Legal Definitions - assume or reject

Definition: In bankruptcy, the debtor-in-possession or trustee must decide whether to keep or terminate a contract or lease within a certain time frame. This decision is based on the chapter of the Bankruptcy Code and the nature of the contract. The process and consequences of this decision are outlined in 11 USCA § 365.

Example 1: A small business owner files for Chapter 11 bankruptcy. They have a lease for their storefront that still has two years left on it. The owner must decide whether to assume or reject the lease within a certain time frame. If they assume the lease, they must continue to pay rent and fulfill the terms of the lease. If they reject the lease, they can terminate it and move out of the storefront.

Example 2: A company files for Chapter 7 bankruptcy. They have a contract with a supplier for materials that they need to fulfill customer orders. The trustee must decide whether to assume or reject the contract. If they assume the contract, they must continue to purchase materials from the supplier and fulfill the terms of the contract. If they reject the contract, they can terminate it and find a new supplier.

These examples illustrate how the decision to assume or reject a contract or lease can have significant consequences for a bankrupt entity. It can impact their ability to continue operating, fulfill obligations, and ultimately, their chances of successfully emerging from bankruptcy.