What happens to the contracts that a debtor is still performing at the start of a bankruptcy proceeding?

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Sometimes, a debtor will still be in the process of performing a contract when he or she files for bankruptcy.  If the contract is still at a stage where both the debtor and the contracting party have not finished their performance, the liquidator often has the choice between continuing the contract or canceling it completely.  If performance on the contract would result in further assets for the debtor to distribute to creditors, it is in court’s interest to allow the debtor to continue performance of the contract.

If the liquidator chooses to let the debtor continue the contract, the liquidator must obtain permission from the court to allow the debtor to continue performance on the contract.  If the liquidator cancels the contract then both the debtor and the contracting party no longer need to continue performance on the contract.

If you have any questions about bankruptcy’s effects on an outstanding contract, please contact our office for a legal consultation.