How Does Chapter 11 Bankruptcy Affect Contracts and Leases?

A bankruptcy filing will impact many elements of a business, including any contracts and leases the business owner is currently bound by. Our West Palm Beach bankruptcy lawyer explains how these agreements are handled.

It is not uncommon for businesses to file Chapter 11 bankruptcy to have existing obligations under a commercial lease and other business contracts. A bankruptcy filing may or may not release you from your obligations under these legal contracts, depending on the situation. Below, our West Palm Beach bankruptcy lawyer explains further.

Understanding Executory Contracts

When a business owner has unfulfilled obligations under a contract, and the other party does as well, it is known as an ‘unexpired lease’ or, legally, an ‘executory contract.’ During a Chapter 11 bankruptcy, the business owner’s debts will be reorganized into a repayment plan. In rare instances, certain assets may also be sold to cover some of the business’s expenses. If a business owner misses payments to their landlord or other party, the party that sustained the loss can take legal action against them. This is not necessarily the case when a business owner files Chapter 11 bankruptcy with executory contracts in place.

The business owner and the bankruptcy trustee who oversees the case both have certain rights when it comes to executory contracts. The business owner has the option of assuming or rejecting the contract. Before the decision has been made to assume or reject the contract, the other party must continue fulfilling their obligations under the agreement.

What Happens if a Business Owner Assumes a Contract?

If a business owner assumes a contract, the contract will still be in effect. However, there are certain considerations. If the business owner has already defaulted on the agreement, they must correct the default and provide compensation for the other party’s losses. They must also show that they have the full intention of following through with their contractual obligations. If a business owner cannot do this, they cannot assume the contract.

There are certain types of executory contracts that cannot be assumed, such as agreements to loan another party money. The trustee may also have the right to sell the contract to another business.

What Happens if a Business Owner Rejects a Contract?

If a business owner rejects a contract, it is treated similarly to if they had breached the contract. Neither side is responsible for fulfilling its obligations. However, if the other party sustained losses as a result of the breach, they may be able to file a lawsuit against the business owner to recover their losses. While this is a possibility, it is rare for entities to show interest in suing a company that is already suffering financially.

Our Bankruptcy Lawyer in West Palm Beach Can Help

Filing Chapter 11 always has the potential to become complicated, and you will likely have many questions along the way. At Brian K. McMahon, P.A., our West Palm Beach bankruptcy lawyer can answer them and make the process as easy as possible for you. Call us today at (561) 658-1789 or contact us online to schedule a consultation and to learn more.