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 Massachusetts, 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, as governed by federal bankruptcy law. 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 may involve curing any defaults and providing adequate assurance of future performance. Conversely, if they reject the contract or lease, they are indicating a refusal to perform the remaining obligations, which effectively breaches the contract. Rejection is treated as a pre-petition breach, allowing the other party to the contract to file a claim for damages as a result of the breach. The decision to assume or reject a contract or lease must be approved by the bankruptcy court. This process is primarily governed by Section 365 of the United States Bankruptcy Code, and while state law can influence the interpretation of the contract terms, the federal law provides the framework for the assumption or rejection of contracts in bankruptcy.