When some or all of a debtor’s obligations under an existing contract or lease have yet to be performed, the debtor (or the bankruptcy trustee) can decide whether to agree to perform or refuse to perform its obligations under the contract or lease. If the debtor agrees to perform its remaining obligations it has assumed responsibility for the contract or lease. This is called an assumption of the contract or lease. And if the debtor or bankruptcy trustee refuses to perform the remaining obligations under the contract or lease it is a rejection of the contract or lease.

In Alabama, as in other states, when a debtor files for bankruptcy, they or the bankruptcy trustee have the option to assume or reject executory contracts and unexpired leases under Section 365 of the Federal Bankruptcy Code. An executory contract is one in which both parties still have significant performance remaining. If the debtor or trustee assumes the contract or lease, they agree to continue performing the obligations under the agreement, which often involves curing any defaults and providing adequate assurance of future performance. Conversely, if they reject the contract or lease, they are essentially choosing to breach it, which can relieve the debtor of future performance obligations but may result in a claim for damages against the bankruptcy estate. The decision to assume or reject must be made by the deadline set by the bankruptcy court, which is typically within 120 days for non-residential leases, extendable by 90 days with court approval. For residential leases, the deadline is 60 days. This process allows the debtor to reorganize their affairs by deciding which contracts are beneficial to retain and which are not. The bankruptcy court must approve the assumption or rejection, ensuring that the decision is in the best interest of the debtor and the creditors.