The Effect of Bankruptcy on a Contractual Obligation

Will the Contract Automatically Be Terminated?

If you’re struggling to make ends meet, but working hard to improve your financial situation, you may find it in your best interests to seek protection in bankruptcy, even though you have leases or contracts that generate income for you. As a general rule, those leases and contracts will be considered property and must be included in your bankruptcy estate. Will they automatically terminate with the filing of a Chapter 7 petition? That’s up to the bankruptcy trustee.

The Special Treatment of Contracts and Leases in Chapter 7

Filing a petition to discharge debts through Chapter 7 will not automatically void any contracts or leases to which you are a party. Instead, the bankruptcy trustee will typically have 60 days to review the agreements and determine whether they will provide the most benefit to the bankruptcy estate by being assumed or by being rejected. If the trustee believes that maintaining the contractual arrangements will bring the most revenue to the bankruptcy estate, the trustee must file a motion with the bankruptcy court, indicating an intent to assume the obligation. If, however, the trustee deems the contracts or leases to provide little or no value to the bankruptcy estate, they will simply lapse after 60 days—the trustee is not required to affirmatively reject or terminate those contracts.

With a Chapter 7 bankruptcy, the entire process is typically completed in a period of months (unlike a Chapter 13, which can extend for up to five years). Accordingly, the trustee won’t want to be involved in a long-term arrangement. As a result, the trustee will typically sell the right to receive income on a contract or lease to a third party and immediately deposit the proceeds into the bankruptcy estate.

Contact Attorney Howard N. Sobel

At the office of Howard N. Sobel, we provide personal bankruptcy counsel to men and women throughout the state of New Jersey. Contact our office online or call us at 856-424-6400 to set up a free initial consultation. Evening and weekend appointments can be arranged upon request. We accept all major credit cards.

Named a New Jersey SuperLawyer Every Year since 2008, Including 2023