How Filing for Bankruptcy Can Retain Key Professional Relationships

by San Antonio Attorney

Many entrepreneurs consider a bankruptcy filing as the final nail in the coffin of a struggling business—a challenging process that somehow adds to the stress of experiencing severe financial hardship.

But, did you know that filing for bankruptcy can actually help a business retain, or even revive important business connections that would otherwise be terminated without a formal bankruptcy filing? This includes crucial ties and deals with partners and other stakeholders that aid in present operations and may help keep the door open to future recovery.

Take note that in a bankruptcy process, only executory contracts (such as unexpired agreements or leases) can be undertaken or denied depending on court approval and subject to specific conditions. Agreements nullified prior to the filing date are considered non-executory and cannot be undertaken or rejected.

Defined by Harvard Professor Vern Countryman as an agreement where the responsibilities of both parties are either totally or partially unfulfilled so as to consider one’s failure to complete a legal breach that excuses the other party, executory contracts have considerable impact for business operators, lessors, or lessees who are looking for ways to carry on relationships with key contacts, or those who are hoping to settle future obligations that can become too onerous for the borrower.

Using the abovementioned definition, non-executory contracts cover cases wherein one party has already fulfilled its commitment to such an extent that further inability to perform will not result in a breach of contract.  As it is, such agreements cannot be undertaken or denied.

In a bankruptcy process, all assumed executory contracts are considered binding and in full effect. The said contract can also be sold or assigned an appropriate value.  This holds true even if the debtor defaults on the terms of the contract, as long as the default is remedied and a guarantee of improved performance is given.

As such, filing bankruptcy allows a struggling borrower to maintain or restore business relationships that would otherwise be defaulted, as long as all relevant executory contracts are assumed and undertaken.  It also gives debtors the chance to make the most out of existing executory contracts towards the recovery of the business.

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