Lohr & Associates, LTD.

Bankruptcy’s Effect on Contracts



When a debtor, which is either the person or the entity that has filed for bankruptcy protection, has exchanged promises with another prior to filing a bankruptcy petition, and the duties associated with these promises extend beyond the date that the bankruptcy was commenced, the subject of these promises may be either an executory contract or unexpired lease. While leases are usually easier to identify, what constitutes an executory contract has been the subject of much litigation. The Bankruptcy Code does not define the term “executory contract,” however, probably the most widely-accepted definition is the following which was provided by Vern Countryman: “a contract under which the obligation of both the [debtor] and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.”2 As will be illustrated below, an executory contract is both an asset and liability. Suppose that ABC Company paid a feed supplier $230 which promises to give ABC Company a ton of feed corn in one week. ABC Company files a bankruptcy petition under chapter 7 of the Bankruptcy Code. ABC Company’s $230 is gone, however, the trustee has the right to collect one ton of feed corn which is an asset of the bankruptcy estate. This is not an executory contract. By providing payment, ABC Company had completed its obligation, and the only remaining obligation was that of the supplier to provide the feed corn.

How Bankruptcy Changes the Landscape


Consider a husband and wife who own their home in Chester County, Pennsylvania which has a current appraised value of $450,000.  They have two children, ages 4 and 6.  They purchased their home in January, 2006 for $550,000, and there are two mortgages which encumber this property.  The first mortgage had an original balance of $360,000 and the second $85,000.  Their down payment of $105,000 came from the equity they realized from the sale of their prior home.  When they purchased their home, both husband and wife were working and their combined incomes were necessary to pay their daily living expenses.  The husband’s yearly income was $80,000 and the wife’s $50,000.