Executory Contracts in Bankruptcy: Definition, Disclosure, and Implications

Executory contracts play a crucial role in bankruptcy proceedings, as they represent ongoing agreements where both parties have unperformed obligations. Understanding the definition of executory contracts, their disclosure in bankruptcy schedules (specifically Schedule G), and the debtor's options to assume or reject them is essential. This article provides a comprehensive overview of executory contracts, common examples, the consequences of rejection, and the importance of proper disclosure.

Definition of Executory Contracts:

An executory contract is a legal term used in bankruptcy to describe a contract where both parties still have significant unfulfilled obligations. These contracts are considered ongoing and require further performance from both sides.

Disclosure on Schedule G:

Schedule G in bankruptcy is dedicated to executory contracts and unexpired leases. Debtors are required to list all executory contracts, providing details about the agreements and the parties involved. By disclosing these contracts, the bankruptcy court gains an understanding of the debtor's ongoing obligations and their impact on the bankruptcy process.

Assumption or Rejection of Executory Contracts:

In bankruptcy, the debtor has the choice to either assume or reject executory contracts. This decision determines whether the debtor intends to fulfill the contract's obligations or terminate it. The following are key aspects to consider:

1. Assumption: If the debtor decides to assume an executory contract, they agree to continue performing their obligations under the contract. Assumption requires the debtor to cure any existing defaults and provide adequate assurance of future performance. The debtor must demonstrate their ability to meet the contract's requirements going forward.

2. Rejection: Rejection allows the debtor to terminate the executory contract. By rejecting the contract, the debtor is relieved of any future performance obligations. Rejection can be beneficial when the contract is burdensome, financially unviable, or no longer serves the debtor's interests.

Consequences of Rejection:

When an executory contract is rejected in bankruptcy, it gives rise to an unsecured claim against the debtor's bankruptcy estate. The claim represents damages suffered by the non-debtor party due to the rejection of the contract. This unsecured claim is treated as a general unsecured debt, and its dischargeability depends on the specific circumstances and chapter of bankruptcy.

Common Examples of Executory Contracts:

Executory contracts can encompass a wide range of agreements. Some common examples include:

1. Rental Agreements: Residential and commercial leases fall under executory contracts, as both parties have ongoing obligations to maintain the lease terms.

2. Vehicle Leases: Leases for cars, trucks, or other vehicles are considered executory contracts, involving continuing obligations for payments and maintenance.

3. Cell Phone Contracts: Contracts with cell phone service providers that have unperformed obligations, such as ongoing monthly service payments, are considered executory contracts.

4. Installment Agreements: Agreements for the purchase of goods or services with future payments or performance obligations fall under the category of executory contracts.

Presumption of Rejection:

It is important to note that an executory contract is presumed to be rejected unless expressly assumed by the debtor. Failure to assume an executory contract will result in its automatic rejection, relieving the debtor of future performance obligations.

Conclusion:

Executory contracts in bankruptcy play a significant role in defining ongoing obligations between the debtor and other parties. Proper disclosure of these contracts on Schedule G is crucial for the bankruptcy court's understanding of the debtor's obligations. Debtors have the option to assume or reject executory contracts, with each choice carrying specific consequences. Rejection of executory contracts can give rise to an unsecured claim, which may be dischargeable in bankruptcy. Understanding the implications and properly addressing executory contracts is essential in navigating the bankruptcy process successfully. Consultation with a knowledgeable bankruptcy attorney is highly recommended to ensure compliance with legal requirements and make informed decisions regarding executory contracts.