How Chapter 11 Bankruptcy Affects Existing Business Contracts

 Posted on July 11, 2026 in Chapter 11 Bankruptcy

When a business files for Chapter 11 bankruptcy, one of the first practical questions is what happens to the contracts already in place. Vendor agreements, leases, service contracts, and employment agreements do not simply disappear when a bankruptcy is filed. Some can be kept, some can be ended, and some can be changed.

If your business is facing financial difficulties and you are considering a Chapter 11 bankruptcy in 2026, a Liberty County, TX, Chapter 11 bankruptcy lawyer will ensure you understand the legal process and what it means for your business contracts.

What Happens to Contracts When a Business Files Chapter 11?

When a business files for Chapter 11 bankruptcy, an automatic stay goes into effect right away under 11 U.S.C. Section 362. This stops most collection actions, lawsuits, and attempts to enforce contracts against the business. The other party to a contract generally cannot terminate it or take action against the business just because a bankruptcy was filed. This protection gives the business time to look at each contract and decide what to do with it.

What Are Executory Contracts and Why Do They Matter in Chapter 11?

In bankruptcy law, the contracts that matter most are called executory contracts. These are contracts where both sides still have meaningful obligations left to perform. A lease is a classic example. The business still owes rent, and the landlord still owes the right to use the space. A vendor agreement works the same way. The supplier still has to deliver goods, and the business still has to pay for them.

Under 11 U.S.C. Section 365, the business filing for bankruptcy has the right to assume or reject executory contracts. This is one of the most powerful tools available in a Chapter 11 case.

What Does It Mean to Assume a Contract in Chapter 11?

Assuming a contract means the business chooses to keep it and honor its terms going forward. To do this, the business generally has to cure any defaults, meaning it has to pay any past-due amounts owed under the contract. It also has to show it can perform the contract going forward.

Assuming a contract makes sense when it is valuable to the business. A favorable long-term lease, a profitable supplier agreement, or a key customer contract may all be worth keeping because they support the reorganization and help the business stay open and generate revenue.

What Does It Mean to Reject a Contract in Chapter 11?

Rejecting a contract means the debtor elects not to continue performing it. Under 11 U.S.C. § 365(g), rejection is generally treated as a breach of the contract immediately before the date the bankruptcy petition was filed. The other party can file a claim against the bankruptcy estate for its damages, and that claim is generally treated as a general unsecured claim, which often receives less than full payment in a Chapter 11 case.

What Rights Do Contract Counterparties Have in Chapter 11?

The other parties to a business's contracts are not left without protection. They have real rights throughout the Chapter 11 process, including:

• The right to receive notice of whether their contract will be assumed or rejected
• The right to receive payment for any past-due amounts if the contract is assumed
• The right to file a claim for damages against the bankruptcy estate if the contract is rejected
• The right to ask the court to set a deadline for the debtor to decide what to do with the contract

Under 11 U.S.C. Section 365(d), courts can require the debtor to decide within a reasonable time. This prevents businesses from leaving the other party in limbo while the reorganization drags on.

How Does Chapter 11 Affect Commercial Leases Specifically?

Commercial leases get special treatment in Chapter 11. Under 11 U.S.C. Section 365(d)(3), a business must keep paying rent and meeting its lease obligations after filing for bankruptcy, even before it decides whether to keep or reject the lease.

The deadline to make that decision is 120 days after the bankruptcy filing, with a possible 90-day extension if the court approves. Missing these deadlines can result in the lease being automatically rejected, which may not be in the business's best interest if the lease is valuable.

Schedule a Free Consultation With Our Waller County, TX Bankruptcy Attorney

Chapter 11 bankruptcy is a complex process, and how you handle your existing contracts can make a significant difference in whether your reorganization succeeds. Attorney Vicky Fealy is Board-Certified in Consumer Bankruptcy Law by the Texas Board of Legal Specialization and has helped thousands of people and businesses find real relief from financial hardship. The focus here is on helping good people get through hard times and take back control of their finances.

Contact The Fealy Law Firm, PC at 713-526-5220 to schedule your free consultation with our Liberty County, TX Chapter 11 bankruptcy lawyer today.