Bankruptcy Treatment of a Contract for Deed

Legal information, not legal advice. Verify against the cited primary sources before acting. The bankruptcy characterization of a contract for deed (CFD / installment land contract) is genuinely unsettled, splits by circuit and by state property law, and turns on the facts of the particular deal. Last verified: 2026-06-08.

• The scenario. A contract-for-deed deal lands in bankruptcy. Either the buyer (vendee) files — the common case, a buyer behind on installments who wants to keep the home — or the seller (vendor) files. The single question that decides almost everything is a characterization question the Bankruptcy Code never answers cleanly: is the CFD an “executory contract” the trustee can assume or reject under 11 U.S.C. § 365, or is it a completed sale on secured-debt terms — a disguised mortgage — that the buyer can cure and keep? The answer changes who owns the property, who is bound by the automatic stay, whether forfeiture/cancellation can still be run, and whether the buyer’s equitable interest survives. This is the federal-overlay analog of the state-law forfeiture-vs-foreclosure split, and it is just as unresolved.

• The legal problem it creates for a CFD. The two characterizations point in opposite directions, and the wrong one can erase the deal:

  • If the CFD is an executory contract (§ 365 path): the trustee (or Chapter 11/13 debtor-in-possession) must assume or reject it. In a Chapter 7, a contract involving residential real property that is not assumed within 60 days of the order for relief is “deemed rejected” (11 U.S.C. § 365(d)(1)), and rejection “constitutes a breach” (§ 365(g)). To assume, the debtor must cure every default, compensate for pecuniary loss, and give adequate assurance of future performance — all at once, not stretched over a plan (§ 365(b)(1)). A buyer too far behind to cure immediately can therefore lose the property to rejection. This is the seller-favorable characterization.
  • If the CFD is a secured debt (mortgage-equivalent path): there is no assume/reject election. The buyer is the owner of an equitable interest that is property of the estate under § 541(a)(1) (“all legal or equitable interests of the debtor … as of the commencement of the case”), and the seller is a secured creditor whose claim the buyer can cure and pay through a Chapter 13 plan (11 U.S.C. § 1322(b)(3), (b)(5)) — curing the arrearage over a reasonable time while maintaining payments — and keep the home. This is the buyer-favorable characterization, and it aligns the CFD with the dominant equitable-conversion view that the buyer already owns equitable title and the seller holds bare legal title as security.

• The Countryman fault line. Section 365 lets the trustee “assume or reject any executory contract” (§ 365(a)), but the Code does not define the term; the legislative history says only that it “generally includes contracts on which performance remains due to some extent on both sides,” and courts apply the Countryman test — a contract is executory only if material performance remains on both sides such that either party’s failure to finish would be a material breach. The whole CFD split lives in this test. The executory line reasons that the buyer still owes money and the seller still owes the deed, so both sides have unperformed material duties. The secured-debt line reasons that the sale is already complete: the buyer is in possession, owes only money (a one-sided obligation), and the seller’s bare duty to deliver a deed at payoff is a security/title-retention function — a lien release — not a live executory promise. See executory-contract for the doctrine in full, including the parallel (and distinct) property-law/Texas Chapter 5 meaning of “executory contract.”

• What happens to the buyer’s equitable interest. Under the dominant equitable-conversion / equitable-title view, the CFD buyer holds equitable title the moment the contract is signed; the seller’s retained legal title is security. That equitable interest is property of the estate (§ 541(a)(1)) and is protected by the automatic stay the instant the buyer files — so a seller cannot complete a forfeiture or statutory-cancellation after the petition without stay relief. Critically, even courts that call the CFD executory have held the buyer’s equitable interest is not automatically extinguished by rejection: in in-re-mccune-2024 (Bankr. D.N.M. 2024) the court held the New Mexico real estate contract remained property of the estate and the buyers’ equitable interest survived, declining to decide executory-vs-security because the result was the same either way. The deeper a buyer’s equity, the more a court strains to protect that interest — the bankruptcy mirror of the state-law anti-forfeiture drift from skendzel-v-marshall-1973.

• The seller-bankruptcy mirror — § 365(i)/(j) protect the buyer. When the seller files and the CFD is treated as executory, the Code specifically shields a buyer in possession. If the trustee rejects a contract to sell real property and the purchaser is in possession, the purchaser “may treat such contract as terminated, or … may remain in possession” and complete the payments to receive title (11 U.S.C. § 365(i)). If the purchaser instead treats the contract as terminated (or was not in possession), the purchaser “has a lien on the interest of the debtor in such property for the recovery of any portion of the purchase price” already paid (§ 365(j)). So a buyer who has paid down a CFD is not simply wiped out by the seller’s bankruptcy — they keep an occupancy/completion right or a lien for what they paid. (These very provisions are the textual hook the secured-debt line uses to argue that, when the buyer is the debtor, the contract should be treated as a lien consistent with Congress’s mortgagor-protective design — see In re Booth below.)

• The strong-arm trap — record the interest. A trustee takes the powers of a hypothetical bona fide purchaser of real property as of filing (11 U.S.C. § 544(a)(3)) and may avoid an interest that an applicable-law BFP could have taken free of. A CFD buyer (or, in the seller’s case, the buyer’s interest) that is unrecorded is exposed to this strong-arm avoidance — the unrecorded equitable interest can be defeated as if a BFP had bought ahead of it. Recording a memorandum of the contract is the cure. This is why several state pages flag the unrecorded-buyer risk (e.g., missouri).

• Anti-modification and the principal-residence wrinkle. If a court treats the CFD as a claim secured only by a security interest in the debtor’s principal residence, § 1322(b)(2)‘s anti-modification rule bars stripping or cramming down that claim — but the buyer may still cure the default and maintain payments under § 1322(b)(5), and may cure “until such residence is sold at a foreclosure sale” (§ 1322(c)(1)). If the secured CFD is not the principal residence (investment property), the claim can be modified / bifurcated and paid as a secured claim under § 1325(a)(5). Either way, the secured-debt characterization gives the buyer a cure-and-keep path the executory characterization denies.

• How jurisdictions and courts handle it (the split). Section 365 is federal, but bankruptcy courts look to state property law to decide what the parties own — so a state that treats the CFD buyer as equitable owner and the seller’s title as security tilts toward the secured-debt result, while a state whose law makes the seller a true title-holder owing future conveyance tilts toward executory. The retrieved authorities map onto a real split:

  • Executory line (assume/reject): Speck v. First National Bank of Sioux Falls, 798 F.2d 279 (8th Cir. 1986) — applying South Dakota law (vendor’s right to payment and vendee’s right to title are dependent covenants; either’s failure is a material breach), the Eighth Circuit held a contract for deed is an executory contract that must be assumed or rejected under § 365. Cited within in-re-mccune-2024: Shaw v. Dawson (In re Shaw), 48 B.R. 857 (D.N.M. 1985) — New Mexico real estate contract treated as executory.
  • Secured-debt / “lien” line (cure and keep): In re Booth, 19 B.R. 53 (Bankr. D. Utah 1982) — the court reasoned that treating a CFD as an executory contract where the debtor is the vendee ignores the purpose of § 365(i)/(j) (enacted to give non-debtor vendees the protection of mortgagors) and that viewing the CFD as a lien/security device is consistent with that design; a CFD is “too much like” a lien to be force-fit into the assume/reject machinery. The state-law engines that push this direction are the treat-as-mortgage states: Kentucky (Sebastian v. Floyd, 585 S.W.2d 381 (Ky. 1979) — installment land contract is a purchase-money mortgage), Indiana (Skendzel — vendor/vendee as mortgagee/mortgagor), and statutory mortgage-equivalence states like oklahoma and florida.
  • Contested / declines to resolve: In re McCune, No. 20-12326-j7 (Bankr. D.N.M. Apr. 5, 2024) — canvassed the split, declined to decide it, and held the buyer’s equitable interest survived either way and stayed property of the estate. in-re-mccune-2024.

• Operator mitigation. Five practical steps keep a CFD deal from blowing up in the counterparty’s bankruptcy:

  1. Record a memorandum of the contract at closing. Recording defeats the trustee’s § 544(a)(3) strong-arm BFP power, perfects the buyer’s equitable interest, and (in many states) is independently mandatory. See recording-and-priority.
  2. Assume the automatic stay applies the moment the buyer files. Do not run forfeiture, statutory-cancellation, or eviction post-petition without stay relief — a post-petition cancellation is void and sanctionable. The buyer’s equitable interest is property of the estate (§ 541(a)(1)).
  3. Know which side of the split your state and circuit fall on before you move. In the Eighth Circuit (and South Dakota law) a CFD is executory (Speck) — a seller may benefit from a rejection that hands the property back. In treat-as-mortgage states (KY, IN, OK, FL) and under the Booth reasoning, the CFD is a secured debt the buyer cures and keeps — file your claim as a secured creditor, not a rejection motion.
  4. Complete and document forfeiture/cancellation before any petition if you intend to rely on it: a CFD fully terminated pre-petition under state law leaves the buyer with no interest to bring into the estate; an un-terminated CFD (or one only mid-cancellation) brings the equitable interest in. Sequence matters.
  5. In a seller bankruptcy, expect § 365(i)/(j): a buyer in possession can stay and complete payments for the deed, or claim a lien for payments made — you cannot reject your way out of a paid-down buyer’s interest.

▸ For Sellers / Operators — The compliance-critical facts, in order: (1) The split is real and unresolved, so the outcome of your buyer’s bankruptcy turns on your state’s property law and your circuit. In the Eighth Circuit a CFD is an executory contract (Speck v. First Nat’l Bank, 798 F.2d 279 (8th Cir. 1986)) the buyer must assume by curing everything at once (§ 365(b)(1)) — favorable to you. In treat-as-mortgage states (KY, IN, OK, FL) and under In re Booth, the CFD is a secured debt the buyer cures over a Chapter 13 plan and keeps (§ 1322(b)(5)) — file a secured proof of claim, not a rejection motion. (2) The automatic stay binds you the instant the buyer files. A post-petition forfeiture/cancellation or eviction without stay relief is void; the buyer’s equitable interest is property of the estate (§ 541(a)(1)). (3) Sequence your remedy: a CFD fully terminated under state law before the petition keeps the buyer’s interest out of the estate; a half-finished cancellation does not. (4) Record the contract — an unrecorded interest is exposed to the trustee’s § 544(a)(3) strong-arm avoidance, and that cuts against the buyer, not you, but recording also fixes priority you may need. (5) If you are the one who files, § 365(i)/(j) lets a buyer-in-possession complete payments for the deed or claim a lien for what they paid — you cannot reject a paid-down buyer out of the property.

▸ For Buyers — Bankruptcy can save a CFD the state forfeiture clock was about to kill. The moment you file, the automatic stay freezes any forfeiture/cancellation/eviction, and your equitable interest is property of the estate (§ 541(a)(1)). If the court treats your CFD as a secured debt (the buyer-favorable, and increasingly common, characterization), you are the owner: you can cure the arrearage and keep the home through a Chapter 13 plan (§ 1322(b)(3), (5); cure “until … foreclosure sale,” § 1322(c)(1)). Even if the court calls it executory, in-re-mccune-2024 shows your equitable interest is not automatically wiped out by rejection — but you must move fast, because an un-assumed residential contract is deemed rejected in 60 days in Chapter 7 (§ 365(d)(1)), and assumption requires curing the whole default at once (§ 365(b)(1)). Record your contract to protect your interest against the trustee’s strong-arm power (§ 544(a)(3)). Get bankruptcy counsel before the 60-day clock or a foreclosure sale runs.

How the two characterizations compare

Issue	Executory contract (§ 365 path)	Secured debt / disguised mortgage path
Governing mechanism	Trustee/DIP assumes or rejects (§ 365(a))	Buyer is owner; seller is secured creditor (claim)
Test	Countryman — material performance unperformed on both sides	Sale complete; buyer owes only money; seller’s title is security
Chapter 7 default	Residential contract deemed rejected in 60 days if not assumed (§ 365(d)(1))	No assume/reject; interest is estate property (§ 541(a)(1))
To keep the property	Cure all defaults + compensate + adequate assurance — at once (§ 365(b)(1))	Cure arrears over time + maintain payments via plan (§ 1322(b)(3),(5))
Effect of rejection	Rejection = breach (§ 365(g)); buyer may lose deal	N/A (no rejection) — but see in-re-mccune-2024: equity may survive anyway
Buyer’s leverage	Weak if too far behind to cure immediately	Strong — cure-and-keep, anti-modification limits (§ 1322(b)(2))
Representative authority	Speck, 798 F.2d 279 (8th Cir. 1986); In re Shaw, 48 B.R. 857 (D.N.M. 1985)	In re Booth, 19 B.R. 53 (Bankr. D. Utah 1982); Sebastian v. Floyd; Skendzel
Tilting state law	Dependent-covenants / true-title-retention states (e.g., South Dakota)	Equitable-conversion + treat-as-mortgage states (KY, IN, OK, FL, and the majority equitable-title states)

Primary sources (retrieved 2026-06-08)

• 11 U.S.C. § 365 (Executory contracts and unexpired leases) — (a) trustee may “assume or reject any executory contract … of the debtor”; (b)(1) cure + compensation + adequate assurance required to assume; (d)(1) Chapter 7 residential contract not assumed within 60 days is “deemed rejected”; (g) rejection “constitutes a breach”; (i) a purchaser in possession under a rejected real-property sale contract may treat it as terminated or remain in possession and complete payments for title; (j) such a purchaser “has a lien on the interest of the debtor in such property for the recovery of any portion of the purchase price” paid. Term “executory contract” is undefined in the Code. https://www.law.cornell.edu/uscode/text/11/365
• 11 U.S.C. § 541(a)(1) — the estate comprises “all legal or equitable interests of the debtor in property as of the commencement of the case” — the buyer’s equitable interest enters the estate. https://www.law.cornell.edu/uscode/text/11/541
• 11 U.S.C. § 544(a)(3) — trustee’s strong-arm powers of a hypothetical “bona fide purchaser of real property … from the debtor” as of filing — defeats an unrecorded CFD interest. https://www.law.cornell.edu/uscode/text/11/544
• 11 U.S.C. § 1322(b)(2), (b)(3), (b)(5), (c) — Chapter 13 plan may cure or waive any default (b)(3) and cure default + maintain payments on a long-term claim (b)(5); anti-modification of a claim “secured only by a security interest in real property that is the debtor’s principal residence” (b)(2); cure permitted “until such residence is sold at a foreclosure sale” (c)(1) — the cure-and-keep engine for a CFD treated as secured. https://www.law.cornell.edu/uscode/text/11/1322
• Speck v. First National Bank of Sioux Falls, 798 F.2d 279 (8th Cir. 1986) — applying South Dakota law (vendor’s payment right and vendee’s title right are dependent covenants; either’s failure is a material breach), holding a contract for deed is an executory contract to be assumed or rejected under § 365. Verified. https://law.justia.com/cases/federal/appellate-courts/F2/798/279/445265/
• In re Booth, 19 B.R. 53 (Bankr. D. Utah 1982) — a CFD where the debtor is the vendee is better treated as a lien/security device than an executory contract, consistent with the mortgagor-protective purpose of § 365(i)/(j); applies the Countryman material-breach-on-both-sides definition. Verified via citation + holding (CourtListener). https://www.courtlistener.com/opinion/1956573/in-re-booth/
• In re McCune, No. 20-12326-j7 (Bankr. D.N.M. Apr. 5, 2024) — REC remained property of the estate; buyer’s equitable interest survived; court declined to resolve executory-vs-security; canvasses In re Shaw, 48 B.R. 857 (D.N.M. 1985) (executory) against the security-device line. Verified opinion. in-re-mccune-2024 https://www.nmb.uscourts.gov/sites/default/files/opinions/McCune-Memorandum-Opinion-Doc-332.pdf
• Sebastian v. Floyd, 585 S.W.2d 381 (Ky. 1979) — installment land contract is in substance a purchase-money mortgage (secured-debt side). sebastian-v-floyd-1979 https://www.courtlistener.com/opinion/2391388/sebastian-v-floyd/
• Skendzel v. Marshall, 261 Ind. 226, 301 N.E.2d 641 (Ind. 1973) — vendor/vendee as mortgagee/mortgagor (security characterization). skendzel-v-marshall-1973 https://www.courtlistener.com/opinion/2210689/skendzel-v-marshall/

Meta

• needs_verification:
  • Verbatim opinion text of Speck and In re Booth. Both citations, courts, years, and holdings are corroborated by the official Justia/CourtListener case pages and case-law search this run, but the reader could not return the full opinion body verbatim (Justia 403 / CourtListener empty-body on fetch). Confirm the exact holding language on Google Scholar or the official reporter before quoting either case as a verbatim holding.
  • A controlling holding for each circuit / state on the executory-vs-secured characterization. Only the Eighth Circuit (Speck, via South Dakota law) and the District of New Mexico (Shaw/McCune) are anchored to retrieved authority here; the Sixth Circuit (MI/OH), Seventh (IL/IN/WI), and Ninth (CA/AZ/NV) positions are asserted only through the underlying state treat-as-mortgage law, not a retrieved bankruptcy holding. Pull a circuit-level CFD bankruptcy opinion per circuit on later passes.
  • § 1322(c)(1) “foreclosure sale” application to a CFD that forfeits rather than forecloses. Where state law cancels/forfeits a CFD (no foreclosure sale), whether the § 1322(c)(1) cure-until-sale deadline maps cleanly onto the CFD termination event was not resolved against a retrieved opinion this run.
  • Whether Nobelman v. American Savings Bank, 508 U.S. 324 (1993) (the principal-residence anti-modification holding) has been applied to a CFD-as-mortgage claim specifically — cited here only for the § 1322(b)(2) framework; the CFD-specific application is not retrieved.
• open_questions:
  • When a CFD is “executory” in the Texas Chapter 5 property-law sense but the buyer owes only money, does the seller’s bare deed-delivery duty supply the second side of Countryman material performance — or is it a mere security release? (The doctrinal hinge of the entire split — see executory-contract.)
  • Does recording (and, in Texas, § 5.079’s vendor’s-lien conversion) moot the § 365 question by making the CFD a secured debt as a matter of state law?
  • In the contested states, does the buyer’s percentage of equity at filing drive executory-vs-secured the way substantial equity drives forfeiture-vs-foreclosure?
• cross_links: executory-contract · forfeiture-vs-foreclosure · statutory-cancellation · equitable-conversion · equitable-title · substantial-equity-doctrine · recording-and-priority · in-re-mccune-2024 · sebastian-v-floyd-1979 · skendzel-v-marshall-1973 · texas · kentucky · indiana · oklahoma · florida · south-dakota · new-mexico · missouri · dodd-frank-seller-financing
• changelog:
  • 2026-06-08 — Page created. Built the buyer-vs-seller bankruptcy analysis around the § 365 executory-vs-secured-debt split, the Countryman fault line, and the buyer’s equitable interest as estate property. Cited retrieved primary sources: 11 U.S.C. §§ 365(a),(b)(1),(d)(1),(g),(i),(j); 541(a)(1); 544(a)(3); 1322(b)(2),(b)(3),(b)(5),(c) (Cornell LII). Anchored the split to verified Speck v. First Nat’l Bank, 798 F.2d 279 (8th Cir. 1986) (executory) and In re Booth, 19 B.R. 53 (Bankr. D. Utah 1982) (lien/secured), with the in-repo verified in-re-mccune-2024 (declines to resolve; equity survives) and the treat-as-mortgage state anchors sebastian-v-floyd-1979 / skendzel-v-marshall-1973. Flagged verbatim-opinion retrieval for Speck/Booth, per-circuit holdings, § 1322(c)(1) forfeiture mapping, and Nobelman’s CFD application under needs_verification.

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Disclaimer. This page is legal information, not legal advice, and may be out of date. The bankruptcy characterization of a contract for deed (executory contract under 11 U.S.C. § 365 vs. secured debt) is unsettled, varies by circuit and by state property law, and turns on the facts of the specific deal and its recording and termination posture. Confirm the current statute, the controlling authority in your circuit, and that any cited case is still good law before filing, moving for stay relief or rejection, proposing a plan, or otherwise acting on a contract for deed in bankruptcy, and consult licensed bankruptcy and real-estate counsel in the relevant jurisdiction.