What happens to my music royalties when I file bankruptcy?

They are not an exempt (protected) asset, and you may lose them if you file the wrong kind of case.  If  chapter 7 trustee can sell those music royalties and use them to pay your creditors, he will.

I had a client who owned something like a 1/64th share of the music royalties for a James Taylor song.  I don’t remember if it was “Fire and Rain,” but that is the song playing in my head as I write this blog entry, so we’ll go with it.  This tiny share of a song written in 1970 still generated a royalty of $250 a month to my client, 40 years later!  My client had some rather overwhelming medical debt, low income, and no real options.  music royalties

Other than this song royalty, she would’ve been an easy chapter 7 case.  However, in a chapter 7, the bankruptcy trustee will attempt to liquidate any asset with real value for the benefit of your creditors.  In other words, the trustee sells things and pays that money to your creditors.  Most people don’t have things for the trustee to sell, and they are safe in a chapter 7.  Here, if my client had filed a chapter 7, the trustee would have sold their music royalty and used the proceeds to pay off her creditors.  An ongoing stream of income of $250 a month stretching into forever does have value.

Instead, we filed a chapter 13 and counted the royalties as income.  The trustee objected and had us pay a small amount for the value of the royalties, and we were able to move forward in a chapter 13 without losing the ongoing royalties.

To sum up, if you file a chapter 7, you’ll lose them.  If you file a chapter 13, you can keep them.