When I am counseling prospective franchisees (or even when I am representing a franchisor in discussions with a prospective franchisee), one of the most common questions I get is "what happens if the franchisor declares bankruptcy?" Although it's not a regular occurrence, it is not unheard of for even an established franchise company to seek bankruptcy protection. Most of the time, the franchisor that files bankruptcy does so under Chapter 11 of the U.S. Bankruptcy Code, which means that the debtor is seeking to restructure its debt so that it can continue operating. Under Chapter 11 filings, franchise agreements will generally not be terminated but instead may be retained by the franchisor or even purchased by another company, who must then assume the obligations of the franchisor under the contract.
But what happens if the franchisor files under Chapter 7 of the Bankruptcy Code? Under those proceedings, the franchise company is declaring itself insolvent and ceases doing business. A new article in Inc. magazine (click here to read it) explores these Chapter 7 filings, and provides some helpful tips about what a franchisee can or should do in that situation.