Executory Contract Or Lease
One of the most important goals of bankruptcy is to give debtors a fresh start on handling their finances. The bankruptcy process tries to achieve this by looking for ways how creditors can be paid either through asset liquidation or through debt reorganization. However, there are some cases when contract obligations are not met by both debtors and creditors. This is where an executory contract or lease comes in.
What is an executory contract or lease?
In bankruptcy, the executory contract refers to both parties – meaning the debtor’s and creditor’s – failing to fulfill the obligations of the contact. By the word executory, that only means that the contract is still in force however both parties are still obligated to yet execute the stipulations stated in it. The most common example of an executory contract is the unexpired lease of personal property wherein a lesson has not yet given the full term leasehold nor the debtor has yet paid the full term. Some of the most concrete examples of executory contracts or leases are:
- boat docking privileges’ agreements;
- business contracts;
- car leases;
- fee requirements from future homeowners’ association;
- insurance contracts;
- patent license and copyright agreements;
- personal property leases;
- real estate contracts of sale;
- rental agreements that may be residential or business leases;
- service contracts;
- surface and underground real estate leases;
- time-share contracts or leases.
Lease options by the trustee: assume or terminate
In the case of an executory contract, the bankruptcy trustee has the option to either assume or terminate the said lease.
When the trustee assumes the contracts that mean that they live with the executory contracts or leases. On the other hand, terminating the contract only means that the bankruptcy trustee rejects or breaches the contract.
Most of the time, a bankruptcy trustee assumes an executory contract when it generates enough funds to pay the unsecured creditors. Otherwise, the lease is likely to be terminated. Since most executory contracts are considered as liabilities, bankruptcy trustees often reject them. However, a debtor has the right to assume lease especially if the lease in question is a personal property like a car lease. The only condition for this is that the debtor provides a written notice to the creditor and they agree. This written notice is provided in the Official Form 8 or the Statement of Intention that a debtor files together with other official bankruptcy forms.
In the same way, a debtor can state his/her intent to terminate a particular executory contract by stating their intentions either with the Statement of Intention or at the bankruptcy meeting.
In the case of a Chapter 7 bankruptcy, the trustee must assume an executory contract within 60 days from the date of filing or it will be automatically rejected. In the case of Chapter 11 or Chapter 13 bankruptcy, there is no specified time limit to assume or terminate an executory lease. Also, there are some special rules applied to executory contracts involving intellectual properties like patent licenses and copyright. Commercial leases for real estate properties are also treated differently under bankruptcy laws. Since bankruptcy rules dealing with executory contracts can become complex, the best thing to do is to get a bankruptcy attorney to help with the bankruptcy case.