Franchisee Bankruptcy: 6 Franchise Agreement Clauses That Trigger on Filing

If you file for bankruptcy, your franchise agreement won’t automatically terminate. A termination clause saying it ends “automatically” on a bankruptcy filing likely won’t be enforceable. The automatic stay also blocks terminations while you seek bankruptcy protection without a court order. Your franchisor can request court permission to end your agreement. A few provisions might matter, though:

• whether past defaults allow termination on their own;
• how long you have to cure those breaches;
• anti-assignment clauses;
• noncompete and confidentiality terms; and
• personal guaranties.

Bankruptcy Termination

To start, if you’ve looked through your franchise agreement, you’ve likely found a clause about bankruptcy. Often, it says something like: “If a franchisee becomes insolvent or bankrupt, is dissolved or liquidated, or makes an assignment for the benefit of creditors, or if any petition is filed by or against a franchisee under any bankruptcy or insolvency law, then the franchise agreement shall be immediately forfeited and terminated.” This is known as an ipso facto clause. These types of clauses--what you could call a “bankruptcy termination” clause--usually are unenforceable as a matter of law under the U.S. Bankruptcy Code. Generally speaking, these types of clauses can’t “self-execute,” meaning a franchisor can’t unilaterally enforce the bankruptcy termination. Your franchise agreement will likely become an asset of the estate.

A franchise agreement will typically have several other “grounds for termination.” So, just because a franchisor can’t invoke a bankruptcy termination clause doesn’t mean it couldn’t look to these other default grounds to terminate the franchise agreement. For example, if you’ve missed royalty or service fee payments or breached other material terms of your franchise agreement, the franchisor can seek to terminate your agreement even if a bankruptcy proceeding is on-going. It’ll need court permission to do so, though.

If your franchisor terminated your agreement for a breach before you filed for bankruptcy, you’re probably thinking that bankruptcy can fix the termination. But the answer’s probably “no.” Consider a case involving 77 Hardee’s franchise locations. The franchisor terminated the agreements in September 2025. The franchisee, ARC Burger, filed for bankruptcy relief as a Chapter 7 debtor in April 2026. Because the franchise agreements already were terminated, Hardee’s plans to reopen more than 40 of the restaurants as corporate stores. It does get tricky: a lot depends on the exact terms of your agreement, especially regarding any default cure periods. Termination must be clear. In 2018, Applebee’s kept extending deadlines for cure and forbearance for a franchise, so the agreements never “clearly” terminated.

Keep It in Force to Use It Post-bankruptcy

Your main question probably is this: If you file a bankruptcy petition, can you hold off an immediate termination of your agreement? Can you keep it in force to use it post-bankruptcy? To answer that question, you have to turn to your franchise agreement itself and to the Bankruptcy Code. Here’s an important part of the franchise agreement to look at: Its ”cure” language. It lays out what counts as a franchisee default and what you need to do to “cure” the default.

A little different is whether you can ”assume” a franchise agreement. To do that, you’ll need to cure any defaults or provide adequate assurance of prompt cure. You also have to compensate your franchisor for its actual losses. Plus you’ll have to give adequate assurance that you’ll perform properly under the agreement post-bankruptcy. But what if you don’t have to “cure” a default? Say you only went into default for financial reasons like “insolvency, financial condition, or commencement of” a bankruptcy filing. In that case, a cure is unnecessary. The picture is more complex if you’re seeking Chapter 11 protection. Usually, you need to “assume” or “reject” the contract before your plan confirmation, although your court may say you should do so sooner.

Your franchise agreement might require consent before you can transfer or assign the franchise agreement. Typically these clauses include language like “no assignment or transfer may take place without the prior written consent” of the franchisor. So, can you do a bankruptcy transfer or assignment of your franchise agreement? Your franchise agreement’s terms and the Bankruptcy Code provisions both apply. The good news here is that it’s possible under the Bankruptcy Code. Franchisors are naturally worried about your ability to keep performing under the agreement. So, you’ll need to prove adequate assurance of future performance. The bad news is that your franchisor still may have a say as to whether you should be allowed to sell or assign your agreement.

But don’t forget trademark law, which can create an exception, as in the case of Pinnacle Foods of California. The debtor here, a chapter 11 franchisee, couldn’t even assume its franchise agreements without the franchisor’s consent. On this point, the courts disagree. Even with no sale planned, the Ninth, Third, Fourth, and Eleventh Circuit Courts say consent can be necessary. In the First and Fifth Circuits, consent is only needed if you’re actually assigning or selling the agreement.

If you reject an agreement instead of assuming it, that would count as a breach dated just before you filed your bankruptcy, meaning the franchisor’s damages are a pre-bankruptcy claim. As a franchisee, you probably agreed not to compete with your franchisor. You also agreed not to disclose trade secrets. Post-bankruptcy, you’re making plans to start up a new business that might compete with your past franchisor. Will you be able to do so? Not necessarily. In Empower Central Michigan, the court said rejection was allowed but that these terms, or covenants, could still be enforced through injunctions. They couldn’t be reduced to money damages.

As a franchisee, you may have signed a personal guaranty for your liabilities under the franchise agreement, pledging your personal assets in addition to those of your LLC. How does bankruptcy affect a personal guaranty of your franchise agreement? You’d probably expect to benefit from bankruptcy. But Chapter 7 or 11 bankruptcy doesn’t void the personal guaranty, so the guarantor remains personally liable. The franchisor is free to seek payment from you as guarantor.

Save Your Lease

Your store lease might also be the foundation of your company, especially if you run a retail or restaurant franchise. Can you save your lease? As with other contracts, that depends on when and how the lease terminated. If you don’t decide whether to assume or reject it within 120 days after you file, the lease is ”deemed rejected” and viewed as surrendered. The court can add 90 days to that deadline. Lastly, if your lease already terminated before you filed bankruptcy, you can’t assume it.

Filing for bankruptcy is stressful. But making a plan before you file can increase your chances of preserving your franchise agreement. First, learn what your franchise agreement allows you to do. Do you owe back royalties, for instance? Determine when those defaults happened, and find the cure or grace periods. You should address lease issues quickly too. If you want to save your franchise agreement or your lease, timing can be your enemy, so be proactive. Lenders and landlords move quickly after a debtor files for bankruptcy protection. You’re also facing early deadlines as you try to figure out what to do.