Executory Contracts and Leases in Bankruptcy

In Chapter 7 and Chapter 13 Bankruptcy cases, debtors have an opportunity to either continue or terminate any executory contracts or leases. That typically means that debtors will list their executory contracts and unexpired leases on the bankruptcy petition and declare their intention to either to accept or to reject those contracts. If such contracts are not timely assumed, they are deemed rejected, and debtors are released from further performance under those contracts.

An executory contract is an agreement that has not been completed. A contract is an agreement between two or more parties to perform certain specified actions. Once the parties complete all contractual obligations the contract becomes fully executed and the parties to that contract have no further obligation to act under that contract. An example of an executory contract is an agreement to sell property in which the buyer and seller agree to perform certain actions including inspecting the property, making certain repairs, obtaining financing, transferring title, delivering possession and making payment. Until all contractual requirements are met, the contract remains open to be executed. One example of an executory contract that is very common is cell phone contracts.  Cell phone contracts are executory contracts during the typical two-year contract period.  By including the cell phone provider as a creditor in the bankruptcy petition, the contract is automatically terminated, and any early cancellation penalty becomes a dischargeable debt just like any other unsecured debt.

An unexpired lease is a form of contract for the use of certain specified real or personal property that has a specified length of time remaining on the length of the contract. An example of an unexpired lease is a rental agreement for the use of a car or a house where the owner agrees to provide the property to the lessee for a set number of months or years and the lessee agrees to make payments for using that property. For bankruptcy purposes, a timeshare falls into this category.

When a debtor files for bankruptcy, debtor required to list those executory contracts on the bankruptcy schedules because under Section 365 of the U.S. Bankruptcy Code, the trustee is given the power to assume or reject any executory contract or unexpired lease. In other words, bankruptcy trustee can, if he or she chooses, take over the obligation or let it lapse. If the debtor is in Chapter 7 bankruptcy, the trustee gets 60 days to accept or reject an executory contract. A failure to do so leads to an automatic rejection. In Chapter 13 bankruptcy, the trustee may usually assume or reject an executory contract or unexpired lease of residential real property or of personal property at any time before the confirmation of the Chapter 13 Plan.

Bankruptcy code section 11 U.S.C. 365 requires that the debtor assume an executory contract or unexpired lease in a Chapter 7 Bankruptcy within 60 days of filing the case; and in all other chapters of bankruptcy before confirmation of a plan. The court may extend the time to assume such agreements for cause. In the case of non-residential real estate agreements, the time to act is extended to 120 days or longer by court order.

Depending on the situation, the debtor may either assume to reject any executory contract. This decision generally depends on the existing financial circumstances.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.