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 Virginia, 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. 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 that 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 breaching it, which can relieve the debtor of future performance obligations but may result in a claim for damages by the other party. The decision to assume or reject must be made by the deadline set by the bankruptcy court. This process is governed by federal law, specifically Section 365 of the Bankruptcy Code, as bankruptcy is not governed by state law but by federal law. However, state law may influence the treatment of certain types of contracts or leases, such as residential leases, in the context of a bankruptcy case.