A company contracted to perform an obligation for another company that enters bankruptcy usually has the option to unilaterally cancel the contract. Since the bankrupt company may not be able to pay the contracting company for the work it completes, it would be unfair to keep the contractor strictly bound to the terms of the agreement.
When a trustee creates a plan for reorganization of a corporation, he or she does not need to follow the absolute priority rule. Instead, the trustee can create plan that allows the priority and the junior creditor to recoup a portion of their losses, as long as the junior creditor is not repaid on terms that are the same or better than the priority creditor. For example, a plan might call for the priority creditor to receive 90% of his or her debt while the rest of the company’s assets are used to satisfy the debts of the junior creditors.
The bankruptcy estate is composed of the assets held by the applicant at the time of filing for bankruptcy. However, there are some exceptions to what can be included in the estate. When a natural person goes through bankruptcy, the court will limit the estate so that a certain range of assets critical to protecting the debtor’s life cannot be included.