Rejecting Contracts in Chapter 13

Most Chapter 13 bankruptcies in Florida are filed by people trying to save their home from foreclosure. Another use of Chapter 13 bankruptcy is to void contracts. Chapter 13 rules permit debtors to reject an executory contract. An "executory contract" is any contract where each side has duties remaining to perform. An example is a contract to sell real estate, a lease, or an employment contract.

I am currently involved in a case where the debtor is seeking to reject a contract to sell her homestead because, for various reasons, she feels it is better to keep her family in the house rather than sell the house in move. If a debtor rejects a contract the debtor is liable to the other contractual party for actual damages. The other party is an unsecured creditor who has to file a claim in the bankruptcy case and prove breach of contract and the amount of actual damages due to the debtor’s rejection of the contract.

This particular case has an interesting legal issue. The debtor and her spouse owned the house as tenants by the entireties. Debtor and spouse signed a contract to sell their house. The debtor filed bankruptcy without her spouse and sought to reject the sales contract. The bankruptcy judge held that where there is a contract to sell real estate owned by both spouses, one spouse cannot reject the sales contract in Chapter 13 without the other spouse also filing bankruptcy and joining in the contract rejection.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida