Money You Make In An Executory Contract May Be Safe From Bankruptcy

Sometimes in life and in work, we get money that isn’t ours yet. It still needs to be earned. There are conditions on the money. So, even though you have the money in your possession, and you are free to use it, it may have to be paid back, if some condition is not met. But what happens when you file for bankruptcy and that money is in your possession?

Executory Contracts

This is what is known as an executory contract. An executory contract is one where one or both parties still have conditions to fulfill under a previous agreement. If the terms of the contract aren’t complied with, the parties will be in breach of contract.

Executory Contract Examples

One example of this may be an advance on sales or commissions. Let’s say your boss gives you $5,000 this month. However, if you don’t make more than $5,000 in sales or in commissions, you have to pay that money back. That money is yours…but it isn’t totally yours, because your ability to keep it is conditioned upon you making sales, and at the time you file bankruptcy, that hasn’t happened yet.

Another example is military service. In certain military positions, the government will give recruits money. However, the service member’s ability to keep the money is contingent on him or her completing his tour of duty, or some other obligation to the military.

Plenty of jobs also have bonuses or sign on money that would have to be paid back by the debtor, if the debtor leaves employment within a given stated period of time.

Taking Money From an Executory Contract

In these examples, the money has not been earned yet. In theory, the bankruptcy trustee could still take the money, and then fulfill the obligations him or herself. But of course, a trustee is not going to do that—the trustee isn’t going to the debtor’s job to make the debtor’s sales, or joining the military to complete the debtor’s obligations to the military.

The Debtor Must Owe

Note that the trustee won’t touch the contact or the money, if the debtor owes something—in our examples above, the debtor owes military service or work for his employer. But it doesn’t work the other way—if the debtor had completed his or her obligations, but the other side didn’t comply with part of the agreement, that would simply be a liability owed to the debtor, or a potential claim that the debtor has against a third party, and that is an asset that could be taken by the bankruptcy court.

In other words, it is the debtor who still has to “owe” something under the executory contract, for the money the debtor has in his possession to be safe from the bankruptcy court.

If you have money that you still owe something to allow you to keep it, speak to your attorney immediately. Your attorney will get documentation of your obligations, and present them to the bankruptcy court, which will help you keep that money in your bankruptcy, even if it exceeds legal exemption limits.

Contact the Boca Raton bankruptcy attorneys at the Law Offices of Stephen Orchard at 561-455-7961 today to help you protect as many assets as possible in bankruptcy.

Sources:

uk.practicallaw.thomsonreuters.com/0-382-3453?transitionType=Default&contextData=(sc.Default)#:~:text=A%20contract%20under%20which%20unperformed,not%20paid%2C%20are%20executory%20contracts.

justice.gov/jm/civil-resource-manual-59-executory-contracts-bankruptcy