I will gladly pay you Tuesday for a hamburger today. So said Wimpy (of Popeye fame), and so it goes with executory contracts.
An executory contract is, simply put, a contract that requires performance at a later date. For example, when you enter into a cell phone contract that runs for two years, that’s an executory contract. You promise now to pay for service for 24 months into the future.
Other executory contracts we see in everyday life are rental agreements and gym memberships. In the context of a bankruptcy case, these contracts can play a major role.
When you file for bankruptcy, you’re required to list those executory contracts on your schedules. Why? Because under Section 365 the U.S. Bankruptcy Code the trustee is given the power to assume or reject any executory contract or unexpired lease. In other words, your bankruptcy trustee can, if he or she chooses, take over the obligation or let it fall by the side of the proverbial road.
If you’re in Chapter 7 bankruptcy, the trustee gets 60 days to accept or reject the 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.
Cell Phone Contracts Be Gone!
That means if you file for Chapter 7 bankruptcy and have, for example, a cell phone contract then you will no longer be held liable for any early termination fees.
Those ETFs can be pretty heavy depending on your carrier and plan. Though it’s unlikely that the fees would be high enough to justify filing for Chapter 7 bankruptcy on their own, it certainly is a perk.
Beware The Sweetheart Residential Lease
If you’ve got a sweet deal on an apartment, you may want to think twice about filing for Chapter 7 bankruptcy. In this case, the trustee can elect to take over the lease, negotiate a buyout deal with your landlord, and use the profit to pay off your creditors. You end up debt free, but also apartment-free.
There are limitations on the trustee’s ability to do this if the landlord doesn’t consent or if the law prohibits transfer of your interest, but for the right price most of these concerns can be wiped off the table.
The End Of The Car Lease
So, too, with a car lease. If you’ve got a good buyout option and the car is worth more than the amount required to be paid at the end of the lease, the trustee could theoretically strike a deal with the lender to drive that car out from under you.
As an option, you may want to look into Chapter 13 bankruptcy as a way to protect that sweetheart deal.
This article is part of our series on The Bankruptcy Alphabet.
Other Lawyers Playing The Bankruptcy Alphabet Game:
- E Is for Exemptions
- Cate Eranthe says E Is For Equity
- Mark Markus says E Is For Examination
Image credit: Leo Reynolds
I thought that in a C13 it is the debtor who elects assumption or rejection of executory contract in the Plan? Also, the chances that 1. the residential lease is assignable are not very good, 2. residential leases for over 1 year are rare (never seen one) and most are month-to-month tenancies, 3. you still have to get an order to evict tenant (can the bankruptcy court do that? or would it be an unlawful detainer in state court by the trustee? By the Landlord after trustee terminates lease?) How much would a Landlord pay to terminate a residential one year lease? I suppose nothing. Interested to know if anyone has ever had an experience with a trustee terminating a residential lease. (I guess that could happen in a rent control jurisdiction like New York City but aren’t those month to month tenancies that restrict the Landlord’s right to terminate without cause?)