Table of Contents
- How to Decide Which Contracts to Assume or Reject in Bankruptcy
- Why This Decision Matters So Much
- Step 1: Identify Which Agreements Are Actually In Play
- Step 2: Separate Essential Contracts From Burdensome Ones
- Does The Business Stop Functioning Without It?
- Is The Agreement Economically Above Or Below Market?
- Can The Business Replace It Quickly?
- Does It Support A Sale Process?
- Step 3: Calculate The Cure Cost Before Calling A Contract “Valuable”
- Step 4: Consider Whether Future Performance Is Realistically Sustainable
- Step 5: Pay Attention To Timing Deadlines, Especially For Commercial Leases
- Step 6: Understand What Rejection Really Does
- Step 7: Estimate The Rejection-Damages Exposure
- Step 8: Watch For Contracts That Cannot Be Assumed Or Assigned Without Consent
- Step 9: Use The Business-Judgment Lens, But Not In Isolation
- Common Categories Businesses Often Assume
- Common Categories Businesses Often Reject
- Questions That Often Help Clarify The Decision
- What Is The Monthly Cash Burn If We Keep It?
- What Is The Immediate Cure Amount?
- Would A Buyer Pay More If This Agreement Stays In Place?
- Is The Counterparty Likely To Fight?
- What Happens Operationally If The Contract Goes Away?
- Are We Up Against A Statutory Deadline?
- Why Early Legal Analysis Can Change The Outcome
- Final Thoughts
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How to Decide Which Contracts to Assume or Reject in Bankruptcy
When a business files bankruptcy, one of the most important early decisions often involves its ongoing contracts and leases. A company may be paying for warehouse space it no longer uses, relying on a key supplier agreement it cannot operate without, or carrying service contracts that drain cash every month. In Chapter 11 especially, those agreements can shape whether the business stabilizes or keeps sliding.
That is where the assumption-or-rejection decision comes in.
Under 11 U.S.C. § 365, a debtor or trustee may, with court approval, assume or reject many executory contracts and unexpired leases. In general terms, assumption means the estate keeps the deal and agrees to perform going forward; rejection generally functions as a breach, leaving the counterparty with a claim that is often treated as a prepetition unsecured claim. The Supreme Court underscored in Mission Product Holdings v. Tempnology that rejection is a breach, not a rescission of rights that already exist under the contract. You can see the Court’s opinion through the Supreme Court’s published opinions archive.
In this post you’ll learn how businesses and their advisors often evaluate which contracts to keep, which to shed, and what legal and financial issues can change the analysis.
If you want a broader foundation before diving into the decision-making process, it may help to start with this overview of how ongoing deals and leases are treated in bankruptcy.
Why This Decision Matters So Much
Assumption and rejection can affect:
- monthly cash flow
- vendor continuity
- customer commitments
- store and office footprint
- intellectual property rights
- cure costs for defaults
- landlord and contract claims
- the timeline of a Chapter 11 case
The U.S. Courts’ Chapter 11 overview notes that litigation commonly arises over executory contracts and unexpired leases, including whether they will be assumed or rejected. That is not surprising. These agreements often sit at the center of a restructuring strategy.
A business can sometimes improve liquidity by rejecting burdensome agreements. At the same time, assuming the wrong contract can create immediate cure obligations and future performance commitments that the reorganizing company may struggle to meet. So the question is rarely just “Do we like this deal?” It is usually closer to: “Does keeping this contract create measurable value after factoring in cure cost, operational necessity, legal restrictions, and bankruptcy timing?”
Step 1: Identify Which Agreements Are Actually In Play
Not every contract is an executory contract, and not every agreement is subject to the same bankruptcy treatment.
Courts often describe an executory contract as one where significant performance remains due on both sides. The Bankruptcy Basics Glossary from the federal judiciary uses the basic concept that, if a contract is executory, the debtor may assume or reject it subject to court approval. The legislative notes collected with Section 365 likewise explain that executory contracts generally include contracts where performance remains due to some extent on both sides.
In practical terms, businesses often start by sorting agreements into categories such as:
- real property leases
- equipment leases
- supply agreements
- customer contracts
- franchise or distribution agreements
- software and technology licenses
- employment-related agreements
- financing arrangements
- settlement agreements
- intellectual property agreements
This first pass matters because some agreements may not be executory at all, some may be subject to anti-assignment rules under applicable nonbankruptcy law, and some may involve special statutory deadlines.
Step 2: Separate Essential Contracts From Burdensome Ones
Once the inventory is built, the next question is functional: which agreements are truly necessary to preserve enterprise value?
A helpful way to frame the issue is to ask:
Does The Business Stop Functioning Without It?
If a contract governs a critical supplier, a core software platform, a payment processor, or a strategic customer relationship, assumption may become part of a reorganization path. If the agreement disappears, the business may lose revenue, access, or operational continuity overnight.
Is The Agreement Economically Above Or Below Market?
Some contracts are valuable because they lock in favorable pricing, unique product access, or a hard-to-replace location. Others may be obvious candidates for rejection because they are overpriced, underused, or duplicative.
Can The Business Replace It Quickly?
A contract may look burdensome on paper but still be worth keeping if replacement is difficult. This comes up often with regulated vendors, licensed technology, exclusive territory agreements, and customized production relationships.
Does It Support A Sale Process?
In many Chapter 11 cases, assumption is analyzed together with assignment. A buyer may place significant value on certain leases, licenses, or customer contracts. Under Federal Rule of Bankruptcy Procedure 6006, motions to assume, reject, or assign executory contracts and unexpired leases follow specific procedural rules. If a contract improves sale value, the debtor may view it differently than it would in a stand-alone reorganization.
Step 3: Calculate The Cure Cost Before Calling A Contract “Valuable”
A contract may be beneficial going forward and still be too expensive to assume.
Under 11 U.S.C. § 365(b)(1), if there has been a default, assumption generally requires cure, compensation for certain actual pecuniary losses, and adequate assurance of future performance. In plain language, that often means the debtor cannot simply keep the benefits of the contract without addressing arrears and demonstrating an ability to perform after assumption.
This is where businesses sometimes misread the economics. A favorable lease rate or attractive supply contract may look like an easy “keep,” but if the debtor is six months behind and cure costs are substantial, the upfront cash burden can change the analysis quickly.
Some common cure-cost issues include:
- unpaid rent or common area maintenance
- missed minimum purchase obligations
- tax or insurance arrears
- late fees and interest disputes
- reimbursement claims
- default notices that may or may not be curable
- contested amounts tied to nonmonetary defaults
That cure analysis often becomes one of the most heavily negotiated parts of assumption practice.
Step 4: Consider Whether Future Performance Is Realistically Sustainable
Assumption is not just about fixing the past. It also signals a commitment to perform in the future.
Section 365 requires “adequate assurance of future performance” in many assumption settings, and shopping center leases have even more specific protections under the statute. The basic point is straightforward: a debtor typically cannot assume a deal if future performance looks too uncertain under the circumstances set by the Bankruptcy Code and applicable law. See 11 U.S.C. § 365.
That often leads to questions like:
- Will postpetition cash flow support ongoing payments?
- Is this location or contract part of the reorganized business model?
- Are there operational changes that make future compliance doubtful?
- Will a proposed assignee be financially and operationally qualified?
- Are there performance covenants that became unrealistic long before bankruptcy?
For many companies, this is where a contract shifts from “important” to “not assumable in a practical sense.”
Step 5: Pay Attention To Timing Deadlines, Especially For Commercial Leases
Timing can be outcome-determinative.
For unexpired leases of nonresidential real property where the debtor is the lessee, 11 U.S.C. § 365(d)(4) provides that the lease is deemed rejected if the debtor does not assume or reject it by the statutory deadline. The statute sets an initial deadline and permits a limited extension structure, which in many cases results in a 210-day outside window absent landlord consent.
That is one reason commercial lease decisions often move faster than other contract decisions. Missing the deadline can mean deemed rejection and surrender obligations under the statute. Businesses with multiple locations often begin lease triage almost immediately after filing.
This is also why pre-filing planning can matter so much. Many debtors use the weeks before filing to map locations, identify cure exposure, model store profitability, and decide which leases are potential keeps, assignments, or exits.
Step 6: Understand What Rejection Really Does
A lot of business owners hear “reject” and think “cancel.” Bankruptcy law is more nuanced.
Section 365(g), reflected in the text of 11 U.S.C. § 365, generally treats rejection as a breach. The Department of Justice’s archived discussion of executory contracts notes that rejection may be pursued by motion under Section 365(a) or through a Chapter 11 plan under Section 1123(b)(2), and many courts analyze rejection under a business-judgment framework. See the Justice Manual discussion here.
The Supreme Court’s Mission Product decision is especially important because it clarified that rejection does not vaporize rights already granted under the contract. In general terms, the debtor may stop performing its future obligations, but the nondebtor party may still retain rights that survive a breach under nonbankruptcy law. The Court’s slip opinions archive includes the decision in Mission Product Holdings, Inc. v. Tempnology, LLC.
That distinction can matter a great deal with:
- trademark and intellectual property licenses
- distribution rights
- occupancy rights
- exclusivity provisions
- confidentiality and restrictive covenant issues
So when deciding whether to reject, the right question is often not just “Can we stop paying?” but also “What rights does the other side keep even after rejection?”
Step 7: Estimate The Rejection-Damages Exposure
Rejecting a contract may reduce future obligations, but it can create a claim against the estate.
For real property leases, 11 U.S.C. § 502(b)(6) limits a landlord’s allowed claim for damages resulting from lease termination. In simplified terms, the cap is based on the rent reserved and a statutory formula, with limits built into the provision. That cap often makes rejection more manageable than the full remaining rent stream outside bankruptcy.
Still, “capped” does not mean “small.” A lease rejection claim can be material, especially across many locations. And for non-lease contracts, the rejection claim may depend on the contract’s damage provisions and applicable nonbankruptcy law.
Businesses often compare:
- cost to assume and cure
- cost to keep performing long-term
- expected rejection damages
- administrative expenses during the decision period
- relocation or replacement costs
- sale-value impact if the contract is retained
This side-by-side comparison can turn what feels like a legal question into a restructuring finance question.
Step 8: Watch For Contracts That Cannot Be Assumed Or Assigned Without Consent
Some agreements look valuable but raise a different issue: the law may restrict assumption or assignment.
Section 365 includes limitations where “applicable law” excuses the nondebtor party from accepting performance from or rendering performance to an entity other than the debtor, unless the counterparty consents. See 11 U.S.C. § 365(c). This issue can surface with personal service agreements, some intellectual property licenses, government-related contracts, and other relationships where identity matters.
That can alter strategy in a major way. For example:
- a contract may be assumable but not assignable
- a buyer may want the contract, but consent may be required
- the debtor may retain the agreement only if it can continue performing itself
- the parties may negotiate a consensual amendment instead of litigating the issue
When a reorganization depends on a transfer or sale, these consent-related questions often become central.
Step 9: Use The Business-Judgment Lens, But Not In Isolation
Courts often evaluate rejection requests under a business-judgment standard. The Department of Justice’s discussion of executory contracts references that framework in describing rejection under Section 365. See the Justice Manual entry.
In practical terms, that tends to favor debtors when the decision is reasoned, documented, and tied to value preservation. But a business-judgment framing alone does not answer everything. A sound-looking business rationale can still run into:
- inability to cure defaults
- inadequate assurance concerns
- anti-assignment issues
- statutory lease deadlines
- disputes over whether the agreement is executory
- arguments that rejection rights are limited by other law
So the real work usually happens before the motion is filed: building the record, quantifying costs, and anticipating objections.
Common Categories Businesses Often Assume
While every case is fact-specific, contracts often land on the assumption side when they involve:
- profitable or strategic locations
- irreplaceable supplier relationships
- customer agreements tied to major revenue
- software or technology that supports core operations
- favorable pricing locked in before market changes
- agreements that enhance going-concern sale value
- key licenses or permits linked to ongoing business viability
These are often the contracts that support continuity, preserve enterprise value, or make a sale transaction more attractive.
Common Categories Businesses Often Reject
On the other side, rejection is often explored for:
- underperforming store or office leases
- duplicate locations after downsizing or M&A
- service contracts with little operational value
- legacy vendor agreements priced above market
- burdensome exclusivity arrangements
- contracts tied to discontinued product lines
- agreements that no longer fit the reorganized business model
In many Chapter 11 cases, rejection becomes part of a larger simplification process: reducing footprint, eliminating legacy cost structures, and reshaping the business around a smaller profitable core.
Questions That Often Help Clarify The Decision
When business owners and restructuring teams review a contract schedule, these questions often move the analysis forward:
What Is The Monthly Cash Burn If We Keep It?
A contract that drains cash postpetition may become harder to justify unless it supports substantial revenue or indispensable operations.
What Is The Immediate Cure Amount?
If assumption triggers a large payment obligation, the debtor may look at alternatives such as renegotiation, assignment, or rejection.
Would A Buyer Pay More If This Agreement Stays In Place?
In sale-driven Chapter 11 cases, this can be one of the most important questions.
Is The Counterparty Likely To Fight?
A heavily disputed cure amount or anti-assignment issue may increase delay and litigation expense.
What Happens Operationally If The Contract Goes Away?
If rejection creates only minor inconvenience, the economics may favor exit. If rejection disrupts revenue, fulfillment, or compliance, assumption may look more realistic.
Are We Up Against A Statutory Deadline?
Commercial lease timing under Section 365(d)(4) often compresses the decision window significantly.
Why Early Legal Analysis Can Change The Outcome
Assumption and rejection questions are rarely just administrative filings. They often involve litigation risk, valuation issues, contract interpretation, and restructuring strategy all at once.
A bankruptcy attorney may help evaluate:
- whether a contract is executory
- whether defaults are curable
- what cure amount is likely to be contested
- whether assumption, assignment, or rejection fits a sale or plan strategy
- how landlord claims may be capped
- whether the nondebtor’s rights survive rejection
- which deadlines apply and when motions should be filed
For a business owner, CFO, landlord, vendor, or contract counterparty, that analysis can affect leverage just as much as it affects compliance.
Final Thoughts
Deciding which contracts to assume or reject in bankruptcy is one of the clearest examples of how legal strategy and business reality intersect. The answer often depends on a mix of operational necessity, cure cost, future viability, assignment potential, damage exposure, and statutory timing.
Some agreements preserve value and make reorganization possible. Others lock the business into expenses it can no longer support. And many sit in the gray area, where a detailed review of the contract terms, defaults, deadlines, and likely objections makes all the difference.
If your business is evaluating contract and lease strategy in bankruptcy, or if you are on the other side of one of these agreements, an attorney with documented experience in highly similar matters may help clarify the risks, timing, and available paths. Visit ReferU.AI to get matched with an attorney who has demonstrable experience in cases like yours — for free.
