What Are Executory Contracts in Bankruptcy?

Petition to File for Bankruptcy paperwork with a gavel next to it

 

An executory contract is a contract where both parties still need to fulfill important promises. If either party doesn’t keep their promise, it would be considered a big deal and could lead to legal trouble.

Examples of Executory Contracts:

  • Lease Agreements: Like renting an apartment, where the landlord provides a place to live, and the tenant pays rent each month.
  • Service Contracts: When you agree to provide a service, like cleaning or repairs, in exchange for payment.

What Happens to These Contracts in Bankruptcy?

  • Debtor’s Choice:
      • Assume (Keep): The person going bankrupt can decide to keep the contract, meaning they’ll continue with their part of the deal.
      • Reject (Cancel): They can also decide to cancel the contract. In this case, it’s as if they broke the deal right before they declared bankruptcy.
  • If They Keep the Contract (Assume):
      • They need to fix any missed payments or issues (like catching up on rent if they missed a few months).
      • They continue getting the benefits and also have to fulfill their responsibilities.
  • If They Cancel the Contract (Reject):
    • The other person can make a claim to get some money back for breaking the deal.
    • But this claim usually goes into a big pot with other unpaid bills that the bankrupt person or business owes.

When Do They Have to Decide?

  • Chapter 11 (Reorganization): The debtor (person or business) can usually decide any time before their plan to reorganize is approved by the court.
  • Chapter 7 (Liquidation): The court-appointed trustee often has a shorter time to decide.

Need Court Approval:

The bankrupt person or business has to get the court’s permission to keep or cancel any contracts.

Why Is This Important?

  • Keeping contracts (assuming them) can help the bankrupt person stay afloat if the contracts are valuable.
  • Canceling contracts (rejecting them) can help cut off deals that are too expensive.

Executory contracts are simply contracts where both sides still need to deliver something important. In bankruptcy, the debtor can choose to keep or cancel these contracts, which can have a big impact on how things turn out.

 

 

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Attorney Joel R. Spivack is an experienced bankruptcy and residential real estate transactions lawyer in Cherry Hill, New Jersey. Clients come to us for legal services, but what we really provide is peace of mind. For more than 30 years, Attorney Spivack has helped people make wise, informed decisions about bankruptcy filings, debt relief options and residential real estate transactions.
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