Nov/Dec ’07 Guild News

Advocacy Report

Bankruptcy Basics

© 2007 Lisa Shaftel and Robert W. Clarida, Esq.

Unfortunately, it’s happened to many of us: a client goes bankrupt. And they owed us money for a job. Will we ever get paid? They’ve bought out the copyright to our work; can we get our copyright back if they go under?

And, what happens to our copyrights if we are the ones filing for bankruptcy?

Maybe it’s a sign of the times, but more and more businesses and non-profit organizations are going belly-up. As creative professionals, our copyrights, as well as our tangible assets, have monetary value. How does that apply in a bankruptcy situation?

What happens when a client goes bankrupt?
Bankruptcy court will appoint a Trustee to oversee the client’s debts. Anyone to whom the client owes money is called a “creditor.” The Trustee may sell the assets of the debtor [the client] to raise cash to pay off creditors. The bankruptcy Trustee determines which creditors get paid in what order. Higher priority creditors are paid off first, such as “secured” creditors. Secured creditors have some collateral at stake with the debtor (such as a bank mortgage). An illustrator or graphic artist–someone who provides “services rendered”—is probably a “general” creditor, and would be further down the list.

There is no difference if your client was a non-profit organization, a for-profit incorporated business, or an individual.

If the client owes you money for a job, will you get paid? Yes, but probably not the full value of what you are owed. There’s no rule as to what percentage on the dollar you’ll get paid; that depends on how many creditors there are and how much money is left after the secured creditors are paid.

You have the right to get paid in the same ratio as the class of creditors you’re in. When the bankruptcy petition is filed, the Trustee will make a list of assets and all the creditors in the order they’ll be paid. If you’re not listed in the petition, you should file to be listed as a creditor with the bankruptcy court. There’s no way to predict how long it will take for you to get paid.

If and when the organization or business comes out of bankruptcy, it starts with a clean slate. All debts are discharged in a bankruptcy, so you cannot collect after the bankruptcy procedure is completed.

You have no legal right to get back a tangible piece of art you’ve sold the client or organization when it files for bankruptcy. The title of the artwork has passed to the buyer; it is their asset, and it gets sold off to raise cash to pay creditors.

Is there anything you could include in your contracts for projects with clients to protect yourself and get paid if they file for bankruptcy? Well, yes and no. The best thing to do is demand final payment when the job is finished in your payment schedule, and don’t turn over your files or artwork until they pay you. You might insist on being paid in cash, so they can’t bounce a check. You might also stipulate in your contracts that your copyrights sold to the client revert back to you in the event of bankruptcy; however, this may not be upheld by the bankruptcy court.

And what if you, the artist, file for bankruptcy?
When you file for bankruptcy, you will have to list your assets and debts, and a Trustee will be appointed to sell off your assets and pay your creditors. The Trustee will sell your artwork if it’s your company’s assets (not personal work). If your copyrights are in the name of your company, your company will have to sell your copyrights to raise cash to pay your creditors.

What’s the difference if your business is incorporated or not?
If you are incorporated, the business declares bankruptcy, but you personally don’t have to declare bankruptcy. In this case, only your company’s assets are at risk, not your personal assets. This is one advantage to incorporating. But be conscientious that you don’t commingle your personal finances with your business finances. Pay company bills with a company account. If your car is owned by your company, that would be considered an asset and would be sold by the Trustee to pay off your debts. Certain assets are protected by bankruptcy law, such as Individual Retirement Accounts (IRAs).

There is no threshold of debt signaling it’s time for you to file for bankruptcy, no magic number of how deep of a hole you’re in. Conventional wisdom dictates that if your liabilities exceed your assets and you can’t pay your bills… What does that mean? You have money coming in and you can’t pay your bills and you can’t sustain yourself. But don’t think that bankruptcy is the easy way out. Chapter 7 Bankruptcy (total bankruptcy) stays on your credit report for 10 years. Chapter 13 Bankruptcy (like a repayment plan) stays on your credit report for 7 years. It will be difficult, if not impossible, for you to ever get a loan, (e.g. for a car or a mortgage). Instead of filing for bankruptcy, first go to a certified financial counselor to get help paying off your debts.
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Lisa Shaftel is the Graphic Artists Guild’s National Advocacy Committee Chairperson and Robert W. Clarida, Esq. is a partner in the firm, Cowan, Liebowitz & Latman, P.C., New York.

Your Lobbyist on Capitol Hill

The Graphic Artists Guild hired Megan E. Gray as our lobbyist in late 2006 to represent the concerns and intellectual property rights of our membership and of all visual artists. Since then, Megan has been working for us in Washington, DC, lobbying Congress on our behalf against “orphan works” legislation. Megan works in close collaboration with Victor Perlman, General Counsel for the American Society of Media Photographers, drafting White Papers and legislative proposals, meeting with Congressional representatives and staffers, and defending the rights of visual creators on Capitol Hill.

Megan E. Gray is an intellectual property attorney in Washington, DC, with a long history of enforcing and defending legal protections in visual art. Her clients include domestic and international companies in the textile, apparel, software, toy, greeting card, graphic art, real estate, and jewelry industries, for whom Megan is busy with licensing, litigation, lobbying, and registration projects. As a result of Megan’s dedication to visual art advancement, she has become one of the foremost authorities on the orphan works legislation that is being discussed for enactment—she was largely responsible for alerting dozens of industries of the disastrous effect that the legislation would have on their ability to stop infringers. Megan’s legal acumen is recognized on a national scale, with numerous speeches, interviews, and publications to her credit. More information on Megan’s credentials can be found at www.roylance.com.

The 2008 National Advocacy Committee Wants YOU!

I want YOU to get involved in the Guild's advocacy activities! Yes YOU! Your opinions matter! And we DO make a difference!

We discuss, address and contribute to:

The activities and policies of the U.S. Copyright Office.
Legislative issues that directly affect how we make our living as professional artists.
Precedent-setting legal cases about copyright infringement, interpretation of copyright law, and contract practices.
Changing policies and business practices in publishing, the Internet, and other media industries.
Collaborative efforts between the Guild and other organizations representing visual creators and authors.
Educating and informing American artists about our rights and professional business practices.

The committee holds bi-monthly (every 2 months) teleconference meetings. The next meeting is Thursday, January 17. Please e-mail me for more information.

Advocacy is the raison d’être of the Graphic Artists Guild!

I'm looking forward to working with you,

Thanks,

Lisa Shaftel
National Advocacy Committee Chairperson
Graphic Artists Guild

Copyright Safeguard

Always save at least one print, copy, or example of your work with your Copyright Registration Certificate.

Keep the hard copies together in a folder.

Here's a list of additional articles in this issue:

Becoming a Digital Designer: A Guide to Careers in Web, Video, Broadcast, Game and Animation Design, 2007

Too Much Multitasking

Click here for a pdf of the complete issue.