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 Pennsylvania, as in all states, the treatment of executory contracts and unexpired leases in bankruptcy is governed by federal law under the United States Bankruptcy Code. When a debtor files for bankruptcy, they or the appointed bankruptcy trustee have the option to assume or reject executory contracts and unexpired leases. An assumption means that the debtor agrees to continue performing their obligations under the contract or lease, which often requires curing any defaults and providing adequate assurance of future performance. Conversely, rejection of the contract or lease allows the debtor to discontinue performance, treating the contract as breached as of the date of the filing of the bankruptcy petition. The other party to the contract or lease then has a claim for damages resulting from the breach, which is typically treated as a pre-petition unsecured claim in the bankruptcy. The decision to assume or reject must be made by the deadline set by the bankruptcy court, and the court must approve the assumption. This process allows the debtor to reorganize their affairs by deciding which contracts are beneficial to maintain and which are not.