When a business struggles to stay afloat, the fine print of existing contracts can become a major concern. As you consider bankruptcy, you may wonder whether these agreements will remain enforceable or become void. The reality is that bankruptcy can have a significant impact on contracts, and understanding the details is crucial.
The automatic stay protection
When you file for bankruptcy, the court issues an automatic stay. This legal shield stops creditors from collecting debts, pursuing lawsuits or terminating contracts based solely on your bankruptcy filing.
The automatic stay gives your business breathing room while you reorganize or liquidate. This federal protection applies immediately upon filing, with no extra steps required.
Types of bankruptcy matter
Chapter 7 bankruptcy liquidates your assets to pay creditors. Under this path, a trustee takes control of your assets and decides which contracts benefit your creditors.
Chapter 11 allows restructuring while continuing operations. This option gives you more power to choose which contracts to keep (assume) or end (reject).
For Florida businesses, this distinction matters greatly depending on your recovery goals.
Executory contracts: A critical decision point
Executory contracts, or agreements where both parties still have obligations to fulfill, receive special treatment in bankruptcy. Your options include:
- Assumption: Keep the contract and continue honoring its terms.
- Rejection: Terminate the contract (this counts as a breach).
- Assignment: Transfer the contract to another party with court approval.
Florida law adds additional protections for certain contracts, such as commercial real estate leases with specific notice requirements.
The need for legal guidance
Every business situation is unique, and bankruptcy laws create a maze of regulations that affect your contracts differently based on countless variables.
Remember, the decisions you make about contracts during bankruptcy will shape your business prospects for years to come. An experienced bankruptcy attorney will analyze your contracts, explain your options and help you make strategic decisions that protect your interests.