What happens to leases or other executory contracts in bankruptcy?

Many people who are considering filing bankruptcy may think they need not concern themselves with the bankruptcy laws governing contracts, thinking that those laws are for those with sophisticated business affairs. However, people are parties to many different types of contracts in their day-to-day affairs, such as real estate leases, automobile leases and cell phone contracts. People considering bankruptcy should be aware of how these contracts are handled in the bankruptcy process.

What is an executory contract?

An executory contract is an agreement between parties that has not been fully "executed," meaning that the parties to the contract still have obligations to perform under the contract. For example, a cell phone service contract is executory because the cell phone service provider has an ongoing obligation to provide phone service to the customer and the customer has an obligation to make monthly payments for the service for the duration of the agreement. A lease for an apartment is also an executory contract, since the landlord needs to provide a space to live for the time of the lease and the tenant needs to pay rent while living in the space for the length of the lease.

What happens to executory contracts in bankruptcy?

Bankruptcy law has special rules for executory contracts. People filing bankruptcy need to list all of their executory contracts on a separate schedule when filing. Bankruptcy allows people to be released from their contracts if they can no longer afford to perform their obligations. People need to decide whether they want to keep, or "assume," their contracts or reject them within 60 days of filing Chapter 7 bankruptcy or before filing a repayment plan in Chapter 13 bankruptcy.

The other parties to the contracts that a filer lists on the schedule of executory contracts must keep performing their obligations under the contracts while the filer decides whether to assume or reject the contracts. If the filer decides to assume the contract, the filer needs to "cure" or repay what should have been paid on the contract. If a filer rejects the contract, then the other party need no longer perform his or her obligations under the contract.

Further questions about bankruptcy?

Bankruptcy laws are complicated, and there are many rules that cover many different aspects of people's finances. It is unwise to try to file bankruptcy without the assistance of a board certified bankruptcy attorney who is well-versed in intricacies of bankruptcy law. People may end up making mistakes that delay their petitions or prevent them from being able to file at all. If you are considering bankruptcy, speak with a bankruptcy attorney to find out more information about the process.