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What happens to my contracts during bankruptcy?

On Behalf of | Oct 18, 2024 | BANKRUPTCY LAW - Business & Commercial Bankruptcy

As a business owner facing bankruptcy, you are worried about your existing contracts. These agreements represent more than just business transactions. They are commitments you have worked hard to establish. Now, as you navigate financial distress, you are probably wondering: What will happen to these contracts?

Automatic stay

When you file for bankruptcy, an automatic stay takes effect. This legal provision halts most collection activities, including those related to your contracts. However, the fate of each contract depends on the type of bankruptcy you file and the specific terms of the agreement.

Chapter 7 bankruptcy

In Chapter 7 bankruptcy, you liquidate your assets to pay off creditors. The bankruptcy trustee can either assume or reject your contracts. Assumed contracts continue, while rejected ones terminate. Any claims arising from breached contracts become unsecured debts.

Chapter 11 bankruptcy

Chapter 11 allows your business to reorganize and continue operating while repaying creditors. During this process, you can assume or reject executory contracts (those with ongoing obligations). Assumed contracts remain in effect, while rejected ones are treated similarly to those in Chapter 7, with claims for damages becoming part of the bankruptcy estate.

Bankruptcy significantly impacts your existing contracts, and understanding these implications can help you make informed decisions. Whether you are filing for Chapter 7 liquidation or Chapter 11 reorganization, knowing your rights and options is essential. Consult with a legal professional to gain clarity and guidance on your specific situation. Remember, while bankruptcy complicates your contractual relationships, it also offers a structured way to address your financial difficulties and move forward.

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