Can a Judge Change a Contract During Bankruptcy?

By Maggie Lourdes

A bankruptcy judge can free you from debt by canceling contracts and any outstanding balances you owe. Judges generally can't force your creditors to accept new terms, or modify existing deals. However, your creditors may voluntarily strike better deals with you to avoid their contracts being canceled outright.

Trustee's Role

When you file bankruptcy, a court-appointed trustee takes control of your assets, including outstanding contracts. The trustee, under court oversight, manages and controls your estate during the court proceedings. A judge must ultimately sign a final order closing the estate and approving the disposal of all assets and distributions.

Executory Contracts

Executory contracts are agreements that run into the future. For example, a one year apartment lease is executory because rents are due for a year after signing. A bankruptcy judge can approve the cancellation of your executory contracts meaning you do not have to fulfill your bargains. For example, the judge can allow you to legally break your one year apartment lease. The judge can also affirm executory contracts meaning your contracts stay in place despite the fact you have filed bankruptcy. A bankruptcy judge cannot force the counter-parties to your contracts to renegotiate terms, nor can he force them to accept newly modified terms.

Get a free, confidential bankruptcy evaluation. Learn More

Business Judgment Rule

The bankruptcy court must approve all contract cancellations and affirmations. Generally, the trustee must convince the judge it is in your best financial interests to affirm, or cancel, your contracts through bankruptcy. The judge uses the business judgment rule test when deciding whether to cancel or affirm your contracts. The overall goal of the business judgment rule is to consider the specific circumstances in your case when deciding what makes the most sense for your financial future.

Automatic Termination

Many contracts have clauses stating if parties file bankruptcy the agreements automatically terminate. For example, it is common to see a contract with language such as, "This agreement shall terminate, without notice, if either party files bankruptcy proceedings." Such clauses are not enforceable in bankruptcy court. Therefore, even if you see an automatic termination clause in an agreement, a bankruptcy judge has the power to affirm it and hold your co-party to its terms.

Get a free, confidential bankruptcy evaluation. Learn More
What is a Notice of Dismissal of Bankruptcy?


Related articles

What Happens to Debt When You Dissolve an LLC?

The formal dissolution of a limited liability company is the end of business operations. Dissolution can be voluntary, like by a passing member vote, or involuntary, by judicial order. The LLC must address its outstanding debt at the time of the filing of dissolution papers with the state department, or as soon as possible after a court order is issued.

Does Chapter 7 Cover Student Loans?

If you are overwhelmed by student loan debt, you may consider filing for bankruptcy. There are two different types of student loans: private and federal loans. Federal student loans are backed by the federal government and offer a fixed interest rate. Banks and other financials institutions issue private loans, and interest rates on these loans are typically much higher than federal loans. While filing for bankruptcy may seem like a good option, it can be very difficult to discharge your student loan debt in bankruptcy and will require a showing that the student loan constitutes an undue burden.

Michigan Law on Divorce Settlements

Michigan is one of the few states where judges can consider marital misconduct when dividing property in a divorce. Spouses can avoid a judge taking fault into consideration at trial by negotiating their own divorce settlement, called a property settlement agreement in Michigan. However, Michigan law regarding these settlements is somewhat complicated.


Related articles

Does Chapter 13 Reduce Debt?

If your debts are out of control, you have the option to declare bankruptcy. In a Chapter 13 bankruptcy, a ...

What If My Cosigner Files Bankruptcy?

If your debts have become unmanageable, you have the option of filing for bankruptcy protection. In a Chapter 7 ...

LLC & Bankruptcy

A limited liability company (LLC) is a form of business organization created by the laws of the state that organized ...

LLC Bankruptcy Laws

The bankruptcy laws pertaining to limited liability companies are hazy. The United States Bankruptcy Code contains no ...

Browse by category
Ready to Begin? GET STARTED