This is the first in a series of articles on the bankruptcy alphabet.

Assuming Leases And Contracts In Bankruptcy

We all make assumptions…about other people, about circumstances, events, expectations.   In bankruptcy and the financial world, “assumption” means something different.  It means essentially to “take over”.

In bankruptcy, a Trustee or debtor is able to assume certain obligations and reject others.   For example, if there is a executory contract** or an unexpired lease that a debtor (or the Trustee) wants to continue with, such as for a building or a vehicle, it can be assumed, or it can be rejected.

Adequate Assurance Of Curing Default On Lease or Contract

If assumed, then all of the obligations (such as making the monthly payments and other contractual requirements) remain in force and effect despite the bankruptcy.

In order to assume a lease or contract that is in default on the date of the bankruptcy filing, the debtor must promptly cure the default or provide “adequate assurance” of a prompt cure, in terms of payment.

Assumption usually takes place in Chapter 11 reorganization or Chapter 13 individual  cases where the debtor is operating a business and wants to continue operating out of a specific location that is being leased, or where certain contracts (such as exclusive listing agreements in real estate).

Section 365 of the bankruptcy code sets out requirements to assume (or reject) unexpired leases and executory (not fully performed) contracts.

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**A contract is “executory” if the obligations of both parties are so far unperformed that the failure of either to complete performance would be a material breach of the contract.

 

 

Image courtesy of Brett Jordan