How Does Bankruptcy Affect Ongoing Business Contracts?

 Posted on March 05, 2026 in Bankruptcy

When a business files for bankruptcy, contracts don't just disappear. Vendors, landlords, suppliers, and service providers all want to know what happens to the agreements they have in place. The answer depends on the type of bankruptcy filed and what the business decides to do with each contract.

If your business is considering bankruptcy in 2026 or you have a contract with a company that has filed, our Galveston, TX bankruptcy lawyer can help you understand what comes next.

What Is an Executory Contract in Bankruptcy?

The first step to understanding how bankruptcy affects your contracts is knowing what counts as an executory contract. An executory contract is one where both sides still have significant obligations left to perform. In other words, neither party has fully finished what they agreed to do.

Common examples of executory contracts in a business context include:

• Equipment leases
• Supply and vendor agreements
• Service contracts
• Software licenses
• Commercial real estate leases

These are the types of agreements that often become important when a business files for bankruptcy.

What Happens to Contracts When a Business Files for Bankruptcy?

Under 11 U.S.C. § 365, when a business files for bankruptcy, it gains the right to either assume or reject its executory contracts. That decision has major consequences for everyone involved.

Assuming a contract means the business agrees to continue following it going forward. Rejecting a contract means the business walks away from it. The choice depends on whether the contract is helping or hurting the business's ability to reorganize or wind down.

The other party to the contract does not get to decide whether the contract is assumed or rejected. Their rights depend entirely on which path the debtor takes.

How Do Contracts Work in Chapter 11 Bankruptcy?

Chapter 11 is a reorganization bankruptcy. The goal is to keep the business alive while restructuring its debts. That is why there is much more flexibility in how contracts are treated in Chapter 11 than in a liquidation.

In a Chapter 11 case, the business can take its time deciding which contracts to assume and which to reject. Under 11 U.S.C. § 365, the decision can generally be made at any point before the court confirms the reorganization plan. The other party to the contract can ask the court to set a deadline if the uncertainty is causing them harm.

If the business decides to assume a contract in Chapter 11, it must do so in full. Under 11 U.S.C. § 365(b), this means curing any missed payments or defaults, compensating the other party for any losses caused by those defaults, and providing adequate assurance that it can perform going forward. The business cannot pick and choose the parts of a contract it likes while rejecting the rest.

How Do Contracts Work in Chapter 7 Bankruptcy?

Chapter 7 is a liquidation bankruptcy. The business is shutting down, not reorganizing. A trustee is appointed to sell off assets and pay creditors. In this situation, contracts are handled very differently.

Under 11 U.S.C. § 365(d)(1), in a Chapter 7 case, the trustee has 60 days from the date of filing to decide whether to assume an executory contract. If the trustee does not assume the contract within that window, it is automatically considered rejected. In practice, most contracts are rejected in Chapter 7 cases because the business is no longer operating and has no use for them.

When a contract is rejected in Chapter 7, the other party is again left with a general unsecured claim against the bankruptcy estate. In a liquidation, those claims are often paid very little or nothing at all, depending on how much is left after secured creditors are paid.

What Are "Ipso Facto" Clauses and Do They Work in Bankruptcy?

Many business contracts contain clauses that say the contract automatically ends or can be terminated if one party files for bankruptcy. These are called ipso facto clauses. Business owners and their contract partners often assume these clauses will protect them.

Under 11 U.S.C. § 365(e), ipso facto clauses are generally not enforceable in bankruptcy. A contract cannot simply be terminated just because a bankruptcy was filed. This rule exists to give the debtor a fair chance to decide whether to assume or reject the contract without the other side pulling the plug automatically.

Schedule a Free Consultation With Our Conroe, TX Business Bankruptcy Attorney

At The Fealy Law Firm, PC, we focus on helping good people through hard times, giving them the tools to take care of their finances and move forward. Attorney Vicky Fealy is Board-Certified in Consumer Bankruptcy Law by The Texas Board of Legal Specialization. She has helped thousands of people and businesses with debt relief, and she is ready to guide you through every step.

Call 713-526-5220 to schedule a free consultation with our Galveston, TX bankruptcy lawyer today.