Bankruptcy provisions in contracts are often included as a safeguard against potential financial instability of a contract counterparty. However, the enforceability of these provisions in bankruptcy is not guaranteed. Key issues include bankruptcy default provisions, anti-assignment provisions, and automatic stay waivers. Bankruptcy default provisions, which trigger contract termination upon insolvency or bankruptcy filing, are generally unenforceable under Section 365(e)(1) of the Bankruptcy Code. Anti-assignment provisions, which prevent the assignment of contracts without consent, are also typically unenforceable in bankruptcy, with exceptions for personal service contracts and certain intellectual property licenses.
Automatic stay waivers, which allow creditors to bypass the automatic stay imposed by Section 362 of the Bankruptcy Code, are rarely enforced. The automatic stay is designed to provide the debtor with a reprieve from creditor actions, making the enforcement of such waivers uncommon. Given these limitations, relying solely on bankruptcy provisions for protection is not advisable. Instead, parties should consider alternative measures such as obtaining third-party guarantees, perfecting liens, and requiring advance payments or deposits.
To effectively navigate the complexities of bankruptcy provisions in contracts, it is crucial to consult with experienced bankruptcy counsel. They can provide guidance on additional protective steps and ensure that your rights are fully safeguarded. Understanding the nuances of bankruptcy law and the enforceability of various contract provisions can help parties better prepare for potential financial challenges involving their contract counterparties. Read full article here.