Unexpired leases and executory contracts can continue on after you file your bankruptcy case. What are they and what makes them special?
Most debts arise out of a written contract. You sign a credit card application agreeing to pay according to the stated terms. Go to a new doctor and you sign a form agreeing to pay for all services to be provided. Buy furniture, appliances, or electronics at a retail chain store after agreeing in writing to pay for the goods purchased. Buy a vehicle and sign the lender’s loan document. Buy a home and sign dozens of mortgage documents.
In all these situations the creditor provides you money, goods, or services which you agree to pay for. At that point the creditor has finished performing its obligation. Now you are supposed to perform your side of the bargain—to pay the debt.
Executory Contracts and Unexpired Leases
But there’s a different kind of debt contract that isn’t as common. These are arrangements in which BOTH the creditor and you have significant acts to perform going forward. The creditor hasn’t already given whatever money, goods, or services it’s required to provide. It’s obligated to continue providing something more, usually ongoing services.
The most common types of executory contracts are unexpired leases. If you are leasing a vehicle or renting an apartment, the lessor/landlord owns the vehicle or the apartment building. It allows you to keep possession of its vehicle/apartment, and continues to provide that to you day by day, month by month.
Bankruptcy Treatment of Executory Contracts and Unexpired Leases
Straightforward debts are relatively easy for bankruptcy to deal with. You owe a debt. The creditor has finished providing you something. Then you file your bankruptcy case and it’s going to discharge—legally write off—that resulting debt or it’s not.
But what if you file a bankruptcy case, but then the creditor continues to be obligated to do things for you during and after your bankruptcy is filed and even completed?
Contracts Still in Force
Here are some examples of consumer executory contracts—in which both parties have continuing obligations—to show how common they can be:
- vehicle leases
- residential rental or lease agreements
- service contracts on home furnaces, security systems, appliances, and electronics
- insurance contracts on everything from your smartphone to your life
- personal property leases, including rent-to-own furniture and appliances
- vacation time-shares
- contracts for purchase of real estate, including a seller-financed purchase of a home
- storage unit rentals
- homeowners’ association agreements with monthly fees and long-term assessments
If you operate a business—even a tiny one—you can have many other kinds of executory contracts and unexpired leases:
- leases of business premises
- equipment and other personal property leases
- contracts with vendors and suppliers
- agreements with independent contractors providing services
- investor and partnership agreements
- software and other computer use and services contracts
- conventional and internet advertising agreements
- specialized real estate leases for timber, oil and minerals
- copyright, patent, trademark, and other intellectual property
- franchise agreements
Keeping Contracts and Dumping Them in Bankruptcy
Because of how different executory contracts and unexpired leases are from conventional debt contracts, the bankruptcy system has had to come up with a special set of laws to deal with them. In the next few blog posts we’ll look at how Chapter 7 and Chapter 13 address these contracts and leases. We’ll see how these options help you keep these contracts when you want to, and dump them when you don’t.