Executory Contracts in Bankruptcy Cases
If you have decided to declare bankruptcy, you are on your way to relief from pressing debt. As a part of this process, you must decide how you wish to handle financial agreements you entered while you were solvent.
There are several options for dealing with executory contracts in bankruptcy cases, each with its own implications. One of our experienced attorneys could help you understand the issues you face as you make your decision. Contact Allmand Law Firm today for guidance.
What Is an Executory Contract?
An executory contract is an agreement that has not yet been fulfilled. For example, if you agree to purchase an item with payment on delivery, the contract remains executory until the merchandise is delivered and you make payment.
Another type of executory contract involves an agreement where you and the other party maintain ongoing obligations to each other, such as:
- Residential leases
- Cell phone contracts
- Gym memberships
- Home security services with a monthly subscription fee
Early in filing for your Chapter 7 or Chapter 13 bankruptcy case, you have to decide whether you want to continue honoring these executory agreements. Talking with one of our attorneys could help you decide if it makes sense to continue with specific contracts.
How Bankruptcy Impacts Executory Agreements
Many contracts contain language saying that the agreement terminates immediately if one party declares bankruptcy, but these provisions may not be enforceable. According to the federal bankruptcy law under 11 United States Code § 365, you, as the debtor, have a choice about whether to continue with the contract, and the other party must continue to honor the current arrangement until you decide which option to pursue.
Assumption
You can assume the contract, which means you agree to honor its terms despite your bankruptcy. If you assume a contract, you must resolve any default. The other party is entitled to seek assurances that you will honor your obligations, so you may need to make a security deposit or get a co-signer.
Rejection
You can choose to reject the contract, which means you will no longer be required to perform under its terms. The other party may file a claim for damages with the bankruptcy court, and your outstanding balance would be treated like the other dischargeable debts in your case. An experienced attorney can help you understand the potential implications of rejecting a specific executory contract in your case. One of our attorneys could explain the potential implications of rejecting a specific executory contract in your bankruptcy case.
Assignment
If the contract does not benefit you during your bankruptcy, but may be of value to someone else, you may be able to assign it. This means that you would transfer the contract to someone who can handle its obligations. You may still owe a debt to the contract holder if you defaulted before transferring it over, but sometimes the person assuming the contract is willing to cure your default as part of the assignment.
Timing
The timeframe in which you must decide to assume, reject, or assign your contracts depends on the form of bankruptcy you choose. If you file under Chapter 7, you have 30 days from the filing date to make your choice and notify the bankruptcy trustee, who makes the final decision.
If you file under Chapter 13, you typically submit your proposed repayment plan, including your intentions regarding executory agreements, at the time of filing. The final ruling on repayment terms comes at a hearing that typically occurs two to three months after the filing date.
Call Us for Help With Executory Agreements in Your Bankruptcy Case
Debtors have a choice in how to handle executory contracts in bankruptcy cases. However, making your decision and persuading the trustee or creditor committee to accept it can be a complex process. If you need guidance, contact our team at Allmand Law Firm today.
