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.