Most small business owners who consider Chapter 11 focus entirely on debt. They want to know what happens to the loan balance, the line of credit, and the personal guarantee. That framing is understandable. It’s also incomplete.
Some companies survive Chapter 11 not because they reduced what they owed a lender, but because they got out of a commercial lease, a supply agreement, or a vendor contract written in a different economic reality. The Bankruptcy Code gives you specific tools for that. Understanding them before your first consultation with a bankruptcy attorney changes what you’re asking in that conversation.
If your business is carrying contracts that no longer make financial sense, a Chapter 11 consultation is worth having before those obligations compound further. Contact us at (321) 320-6088 to schedule a consultation with one of Buchalter & Pelphrey’s Brevard County attorneys.
What Is an Executory Contract?
An executory contract is a contract in which both parties still have obligations to perform. The Bankruptcy Code doesn’t define the term, but most courts apply a consistent standard: each side still owes the other something of material value. That covers a wide range of agreements.
Common executory contracts in a business context include commercial leases, equipment leases, vendor and supplier agreements, franchise agreements, software licensing agreements, and certain employment contracts. If your business signed any of these and both sides are still performing, it qualifies.
These contracts become problems in a distressed business for a predictable reason: they were written when the numbers made sense. Revenue assumptions, market pricing, and cost projections have shifted. The terms stayed the same.
What Can You Do with Those Contracts in Chapter 11?
Chapter 11 gives you three options for each executory contract: assume it, assume and assign it, or reject it.
Assuming means you keep the contract, cure any existing default, and move forward under the original terms. If the contract still works for your business, assumption is the straightforward path.
Assuming and assigning means you transfer the contract to a buyer or a new entity as part of the restructuring. This comes up when a portion of the business is being sold or reorganized into a new structure.
Rejection is the option that surprises most business owners. Rejecting a contract constitutes a formal breach as of the filing date. The other party’s claim for damages becomes an unsecured debt in the bankruptcy estate, capped under the Bankruptcy Code and paid out at whatever percentage unsecured creditors receive under the plan. Rejection requires court approval, and the other party still has a claim. That claim is treated very differently from secured debt.
What Does This Mean for Your Commercial Lease?
If your business is locked into a commercial lease at above-market rent, rejection gives you a legal path out with a capped liability.
Under 11 U.S.C. § 502(b)(6), the landlord’s claim for rejection damages is limited to the greater of one year’s rent or 15 percent of the remaining lease value, and that 15 percent figure tops out at three years’ worth of rent. For a Brevard County business that signed a five-year lease at pre-pandemic rates, the difference between the capped claim and the full remaining obligation is often significant.
The timing of rejection matters. When you reject the lease, the way your reorganization plan affects how the landlord’s claim is classified and paid. That’s a decision worth working through with an attorney before you file.
What Does This Mean for Vendor and Supplier Agreements?
A vendor contract signed when input costs were lower follows the same logic. If the terms no longer reflect what you’d agree to today, rejection converts the vendor’s future performance claim into an unsecured debt. After that, you renegotiate at current market rates or find a new supplier.
Note that some contracts carry specific statutory protections that limit what rejection accomplishes. Intellectual property licenses are the clearest example: under 11 U.S.C. § 365(n), a licensee’s right to continue using the intellectual property may survive a licensor’s rejection. If your contracts involve IP, the analysis is different, and it’s worth flagging before you file.
Which Contracts Are Actually Hurting Your Business?
Businesses in distress tend to focus on their largest creditors and miss contract obligations that are quietly draining margin every month. A commercial lease, a long-term supply agreement, or a service contract can end up costing more cumulatively than a missed loan payment once you run the actual numbers.
A solid Chapter 11 strategy includes a full audit of your executory contracts alongside your debt schedule. The reorganization plan is only as strong as the contract landscape underneath it. If the plan restructures your debt but leaves you in lease terms that still don’t work, you’ve addressed the visible problem and left the operational one in place.
What Does This Look Like for a Small Business in Brevard County?
Subchapter V, the small-business track within Chapter 11, makes this process more accessible to businesses below the current debt threshold. The timeline is shorter, administrative costs are lower, and the contract tools are the same as in a full Chapter 11 case. If your business qualifies, Subchapter V is worth understanding before you assume Chapter 11 is out of reach.
At Buchalter & Pelphrey, we review executory contracts as part of every Chapter 11 consultation for businesses in our area. That means reviewing your leases, vendor agreements, and other executory obligations alongside your debt schedule before we develop any strategy. You’ll see the full picture before you decide.
Chapter 11 doesn’t only restructure debt. It gives you a structured legal process to evaluate every agreement your business is bound by and act on the ones that no longer serve you. For a business that’s viable but carrying the wrong contracts, that distinction matters.
To schedule a Chapter 11 consultation with our attorneys serving Brevard County and the surrounding area, call (321) 320-6088 or contact our team online.