Table of Contents
- 6 Contract and Lease Mistakes That Create Expensive Bankruptcy Problems
- Table Of Contents
- 1. Signing Contracts Without Thinking About Future Assumption Or Rejection
- 2. Ignoring Cure Costs Until The Bankruptcy Case Is Already Underway
- 3. Treating All Anti-Assignment Language The Same
- 4. Missing The Special Timing Rules For Commercial Real Estate Leases
- 5. Assuming Rejection Automatically Erases Every Obligation Or Right
- 6. Waiting Too Long To Map Out Critical Contracts Before Filing
- Why These Mistakes Tend To Get More Expensive In Bankruptcy
- A Final Tip Before A Contract Problem Turns Into A Bankruptcy Problem
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6 Contract and Lease Mistakes That Create Expensive Bankruptcy Problems
When a business starts looking at bankruptcy, people often focus on debt totals, cash flow, lender pressure, and payroll. Those issues matter. But in many cases, the real financial damage is hiding inside contracts and leases that were signed months or years earlier.
A warehouse lease with aggressive default language. A vendor agreement that cannot be assigned easily. A franchise or software license with a bankruptcy-triggered termination clause. A services deal that is profitable on paper but impossible to cure after missed payments. These details can shape whether a business preserves value in bankruptcy or loses it quickly.
That is one reason contract review often becomes central in Chapter 11 and other business bankruptcy matters. Under 11 U.S.C. § 365, a debtor or trustee may assume or reject executory contracts and unexpired leases, subject to important limitations, timing rules, cure obligations, and court approval. The U.S. Courts’ overview of Chapter 11 basics also notes that disputes over assumption and rejection are a regular part of reorganization practice. At the same time, bankruptcy filings have continued rising: the Administrative Office of the U.S. Courts reported that total business filings increased to 24,737 in the 12 months ending December 31, 2025, while Chapter 11 filings had already jumped significantly in 2024 as well. U.S. Courts and Judicial Business 2024.
In this post, you’ll learn six common contract and lease mistakes that can create expensive bankruptcy problems, why they matter, and what business owners often look at when they start evaluating risk. If you want a broader foundation first, it may help to read our guide on how ongoing agreements are treated in bankruptcy.
Table Of Contents
1. Signing Contracts Without Thinking About Future Assumption Or Rejection
A common mistake happens long before any bankruptcy filing: a business signs agreements without considering how those agreements would behave if the company later entered financial distress.
In bankruptcy, not every agreement is treated the same way. Section 365 generally deals with executory contracts and unexpired leases—ongoing arrangements where material obligations remain on both sides. Courts and bankruptcy practitioners regularly analyze whether the debtor may assume a contract and keep it, reject it and treat the rejection as a breach, or in some cases assign it to a buyer or third party. Cornell LII, U.S. Bankruptcy Court for the Northern District of Iowa FAQ, and U.S. Courts.
The expensive problem often starts when owners assume every contract can be kept, transferred, or terminated on simple business terms. In reality, some agreements are far more fragile in bankruptcy than they appear outside bankruptcy. Personal-service arrangements, certain intellectual property licenses, government-related contracts, and agreements affected by nonbankruptcy law can create major disputes over assignability or continued performance. Section 365(c) is one reason these issues can become technical fast. Cornell LII.
Here’s what this often looks like in practice:
- a key customer contract cannot be assigned as easily as expected in a sale process
- an important software or IP license becomes the subject of a fight over continuing rights
- a below-market lease is more valuable than management realized
- a burdensome services agreement drains liquidity but is left unexamined until deadlines are close
In general terms, businesses often benefit from identifying which agreements are actually essential to operations and which ones only appear essential because they have been around for years. That early distinction can change the economics of a restructuring.
2. Ignoring Cure Costs Until The Bankruptcy Case Is Already Underway
Another expensive mistake is focusing only on monthly payments while ignoring default arrears, late fees, tax obligations, CAM reconciliations, attorney’s fees, and other amounts that may have to be cured if the debtor wants to assume a contract or lease.
Section 365(b)(1) generally requires cure of defaults, compensation for certain pecuniary losses, and adequate assurance of future performance before assumption of a defaulted executory contract or unexpired lease. Cornell LII. That can turn a contract that looks manageable into one that is financially impossible to keep.
This issue comes up often with commercial leases. A business may think, “We’re only one or two months behind.” But when the numbers are pulled together, the real amount may include deferred rent, operating expense true-ups, interest, repair obligations, tax pass-throughs, insurance deficiencies, and landlord fee claims. The same problem appears in supply, equipment, franchise, and service contracts.
Why does this become so expensive? Because assumption is often tied to business continuity. If the contract is central to operations and cure costs are understated, the company may discover too late that:
- the estate does not have enough liquidity to assume the agreement
- DIP financing negotiations get harder
- a sale process loses momentum because a buyer expected a cleaner assignment path
- leverage shifts to the nondebtor party at exactly the wrong time
Some people in similar situations are surprised to learn that a contract’s sticker price and its bankruptcy cure price can be very different numbers. That gap is where many expensive surprises live.
If you want a deeper look at the mechanics behind cure amounts, assumption, rejection, and business continuity, our article on what happens when a company keeps or walks away from ongoing agreements expands on those issues in more detail.
3. Treating All Anti-Assignment Language The Same
Many business owners assume one of two things: either anti-assignment clauses always block transfer, or bankruptcy automatically wipes those restrictions away. Neither view captures the full picture.
Section 365 contains language that can override some contractual restrictions on assignment, but it also preserves important limitations. In particular, Section 365(c) and related case law can prevent assignment or even assumption in some categories of agreements where applicable nonbankruptcy law excuses the nondebtor party from accepting performance from someone else. Cornell LII.
That nuance matters a lot in distressed M&A and reorganization planning. A buyer may view a contract portfolio as the heart of the transaction. But if the target’s most valuable agreements include consent-sensitive licenses, regulated relationships, franchise rights, or contracts requiring a particular party’s performance, the assignment analysis may be much more limited than the parties first expected.
This is one of those areas where the wording of the contract is only part of the story. The other part is the interaction between:
- the contract language
- state or federal nonbankruptcy law
- bankruptcy code provisions
- industry-specific rules
- the facts showing whether performance is truly personal or unique
The result can be expensive in at least two ways. First, the debtor may spend time and money negotiating a sale structure that later hits a legal wall. Second, the counterparty may gain leverage because everyone belatedly realizes consent is more important than expected.
An attorney might help determine whether a restriction is merely a contractual barrier, a statutory barrier, or something in between. That distinction often changes valuation.
4. Missing The Special Timing Rules For Commercial Real Estate Leases
Commercial real estate leases have some of the most unforgiving timing rules in business bankruptcy.
Under Section 365(d)(4), a debtor-lessee generally has 120 days after the order for relief to assume or reject an unexpired lease of nonresidential real property, with one court-approved extension of up to 90 days for cause. If the lease is not assumed in time, it is deemed rejected, and the debtor is generally required to surrender the premises. Cornell LII. Practitioners and courts frequently describe this as one of the most rigid lease deadlines in Chapter 11 practice. See, for example, U.S. Courts Chapter 11 Basics and discussion from restructuring materials summarizing Section 365(d)(4)’s 120-day framework and limited extension practice, such as Jones Day.
This creates a major trap for businesses with multiple locations. Management may spend the early weeks of a Chapter 11 focused on payroll, vendors, financing, and customer messaging while lease triage sits in the background. By the time leadership turns to the real estate portfolio, the statutory clock may be closing fast.
The practical risks include:
- losing a favorable location because the lease was not assumed on time
- being pushed into a rushed decision without complete sales or profitability data
- paying professionals to litigate emergency extension or surrender issues
- undermining negotiations with landlords who know the deadline pressure is real
There is another layer here: Section 365(d)(3) generally requires timely performance of postpetition obligations under nonresidential real property leases until assumption or rejection, subject to limited exceptions and case-specific disputes. Cornell LII. So even while deciding what to do, a debtor may continue carrying meaningful occupancy costs.
For companies with several leases, timing mistakes can multiply fast. One overlooked renewal option, one disputed default notice, or one inaccurate lease abstract can become an expensive operational problem.
5. Assuming Rejection Automatically Erases Every Obligation Or Right
This is one of the most misunderstood bankruptcy issues: many people hear that a contract was “rejected” and assume the agreement has vanished completely.
That is not always how the law works.
In Mission Product Holdings, Inc. v. Tempnology, LLC, the U.S. Supreme Court explained that rejection under Section 365 generally operates as a breach, not a rescission. In other words, rejection does not automatically vaporize rights that would survive a breach under applicable nonbankruptcy law. Supreme Court bulletin via Cornell LII, opinion page via Cornell LII, and SCOTUSblog’s analysis.
That distinction matters because businesses sometimes enter bankruptcy with the mistaken view that rejecting an agreement automatically eliminates all downstream obligations, rights of use, or damage exposure. In reality, the consequences depend on the contract, the type of rights involved, and nonbankruptcy law.
For example, rejection may:
- relieve the estate from future performance obligations in important ways
- create a prepetition damages claim for the counterparty
- leave certain rights on the other side intact, depending on the contract and governing law
- trigger litigation over possession, intellectual property, or continuing use rights
This is especially relevant with licenses, long-term occupancy rights, distribution arrangements, and agreements that mix several kinds of obligations together. A business that assumes rejection is a clean erase button may design a restructuring plan around a false premise.
Here’s what this often means in practical terms: contract exit strategy is not the same thing as legal finality. Sometimes a company rejects an agreement and still ends up litigating what rights remain and what damages follow.
6. Waiting Too Long To Map Out Critical Contracts Before Filing
Perhaps the most expensive mistake is also the most common: waiting until the eve of filing to build a contract-and-lease inventory.
By then, management may be trying to answer difficult questions under pressure:
- Which contracts are mission-critical?
- Which agreements are profitable, neutral, or loss-generating?
- Which leases have cure exposure?
- Which counterparties are likely to cooperate?
- Which contracts might support a sale?
- Which agreements have consent or assignment issues?
- Which deadlines are already running?
Those are not easy questions to answer in a crisis, especially if records are incomplete or spread across business units.
The problem is not only legal. It is operational and financial. A late-stage scramble can increase professional fees, delay first-day strategy, reduce negotiating leverage, and produce rushed assumption or rejection decisions that shape the entire case. The U.S. Courts note that Chapter 11 commonly involves ongoing litigation and motion practice over contracts and leases, which helps explain why preparation matters so much. U.S. Courts.
In many middle-market cases, the contract map is effectively the business map. It tells the story of where revenue comes from, where risk sits, and what relationships are transferable. When that map is missing, the bankruptcy process can become significantly more expensive.
Some businesses begin this analysis by creating a simple matrix:
- contract name and counterparty
- term and renewal dates
- current payment status
- claimed defaults
- assignment restrictions
- guaranties
- related litigation
- operational importance
- estimated cure amount
- likely assumption, rejection, or renegotiation path
That kind of organization does not solve the legal issues by itself, but it often makes the legal analysis faster and more grounded in facts.
Why These Mistakes Tend To Get More Expensive In Bankruptcy
Outside bankruptcy, contract mistakes are often manageable through negotiation, amendment, or informal workout. Inside bankruptcy, the same mistakes are filtered through statutory deadlines, motion practice, notice requirements, cure disputes, adequate assurance arguments, and sale-process pressure.
That is why the cost curve changes so quickly. A lease default that looked like an accounting issue can become a courtroom issue. A casual assignment restriction can become a sale obstacle. A contract no one reviewed in years can become one of the most valuable or burdensome assets in the estate.
And because bankruptcy filings have risen in recent years, more businesses are entering formal restructuring environments where these rules come into play. The federal judiciary reported that bankruptcy filings rose to 574,314 total cases in the year ending December 31, 2025, with business filings increasing alongside them. U.S. Courts.
A Final Tip Before A Contract Problem Turns Into A Bankruptcy Problem
When a business is under financial stress, contracts and leases often look like background paperwork until they suddenly become central to survival. By that point, the most expensive issues usually involve timing, cure amounts, assignability, and misunderstandings about what rejection really does.
In general terms, companies often benefit from getting a clearer picture of their agreement portfolio before major decisions are made. An attorney may help evaluate which contracts carry real value, which ones create hidden exposure, and which ones could affect a restructuring, workout, or sale process.
The right lawyer for this kind of issue is rarely just “a bankruptcy lawyer” in the abstract. Fit often depends on documented experience with highly similar matters, including lease assumption disputes, cure-cost negotiations, contract assignment fights, and business reorganization strategy based on evidence from actual court records.
Visit ReferU.AI to get matched with an attorney who has demonstrable experience in cases like yours — for free.
