What Happens to Business Contracts and Leases During Chapter 11 Bankruptcy?

When your business enters Chapter 11 bankruptcy, one of the most pressing concerns is what happens to the agreements that keep your company running. Those office leases, supplier contracts, and service agreements represent the foundation of your daily operations. Understanding how bankruptcy affects these commitments can help you make informed decisions during the reorganization process.

Chapter 11 bankruptcy gives businesses a unique advantage when it comes to contracts and leases. Rather than forcing you to honor every agreement exactly as written, the law provides flexibility to evaluate each contract and decide whether it helps or hinders your company’s recovery. This selective approach allows struggling businesses to shed unprofitable obligations while preserving beneficial relationships.

Can You Cancel Unfavorable Contracts During Chapter 11 Bankruptcy?

One of the most powerful tools in Chapter 11 bankruptcy is the ability to reject leases or contracts that no longer serve your business interests. When you file for bankruptcy protection, you gain the right to review all existing contracts and leases. If an agreement is too expensive, outdated, or otherwise detrimental to your reorganization efforts, you can ask the bankruptcy court to let you walk away from it.

This process, known as contract rejection, requires court approval. You must demonstrate that rejecting the contract benefits your estate and your creditors. For example, if you’re locked into a retail lease at an underperforming location or stuck paying premium prices to a supplier when cheaper alternatives exist, the court will likely approve rejection of those agreements.

However, rejection doesn’t happen immediately. The bankruptcy code provides a reasonable period for you to evaluate your contracts and make decisions. During this time, you must continue performing under most agreements unless the court grants relief. This gives you breathing room to assess which relationships to maintain and which to end.

What Happens When You Assume a Contract or Lease in Bankruptcy?

Not all contracts deserve rejection. Many agreements provide real value to your business and should be continued. When you decide to keep a contract, you “assume” it in bankruptcy terms. Assumption means you commit to honoring the agreement going forward and curing any pre-bankruptcy defaults.

Before the court allows you to assume a contract, you must catch up on any missed payments or other breaches that occurred before filing. If you owe three months of rent on a warehouse lease, you need to pay that arrearage as part o fthe  assumption process. This requirement protects the other party and ensures they receive what they were promised under the original agreement.

Once assumed, the contract continues as if bankruptcy never happened. You must perform all obligations, make timely payments, and honor the terms. The benefit is that you preserve relationships with valuable vendors, landlords, and service providers who contribute to your business success. Assumption also prevents those parties from walking away simply because you filed for bankruptcy.

Can You Modify Contracts During the Bankruptcy Process?

The short answer is not without the other party’s agreement. In bankruptcy, you have to take the contract or lease as written, and assume all of it or reject all of it. However, in certain situations, suppliers or landlords may be willing to renegotiate terms when they understand the alternative is rejection and receiving little or nothing. However, the other party must be willing to negotiate and the court cannot force them to renegotiate the terms if they do not want to negotiate.

The automatic stay that goes into effect when you file bankruptcy also pauses most contract termination rights. This means a landlord can’t evict you, and a supplier can’t cut you off simply because you filed for bankruptcy protection. Instead, they must seek permission from the court before taking any action. This pause gives you time to negotiate and develop a reorganization plan that addresses contractual relationships strategically.

How Does Bankruptcy Affect Executory Contracts?

The bankruptcy code defines  “executory contracts” as one where both parties still have significant obligations to perform.

Some contracts can’t be assumed,  even in bankruptcy. Personal service contracts and certain financial agreements cannot be assumed if the other party objects. Understanding which contracts fall outside the rejection framework helps you plan your reorganization strategy more effectively.

How Can Biggs Law Firm Help You Navigate Contracts During Chapter 11 Bankruptcy?

Evaluating dozens of contracts while managing a struggling business can feel overwhelming. At Biggs Law Firm, we’ve guided numerous North Carolina business owners through the contract analysis process during Chapter 11 bankruptcy. Our hands-on approach means we work directly with you to review each significant agreement, identify opportunities for cost savings, and negotiate modifications that support your reorganization goals.

We understand that contracts represent more than legal obligations. They’re relationships with people and companies you’ve worked with, sometimes for years. Our team helps you make decisions that balance legal strategy with business reality, preserving valuable partnerships while eliminating arrangements that hold your company back.

The bankruptcy court process for assuming or rejecting contracts involves specific procedures and deadlines that must be followed precisely. Our knowledge of bankruptcy law and local court requirements ensures your contract decisions are properly documented and approved, avoiding complications that could derail your reorganization.

Moving Forward With Confidence

Contract and lease decisions during Chapter 11 bankruptcy can determine whether your reorganization succeeds or fails. These agreements often represent your largest ongoing expenses and your most important business relationships. Making informed choices about which contracts to keep, which to reject, and which to renegotiate requires both legal knowledge and business judgment.

If you’re considering Chapter 11 bankruptcy for your North Carolina business, we invite you to schedule a consultation with our experienced legal team. We’ll review your specific contractual obligations, explain your options in clear language, and help you develop a strategy that positions your business for recovery and growth. Contact Biggs Law Firm today at (919) 375-8040 to take the first step toward bringing order out of chaos and rebuilding your business on a stronger foundation.