During this difficult time, you may be considering filing for bankruptcy for your business. But, what happens to your employees if your business files for bankruptcy?

Chapter 11

Most businesses file under Chapter 11 bankruptcy to enter into a repayment plan with creditors or sell off assets with the assistance of the bankruptcy court. Regardless of the reasoning, your business will be protected by the court from legal action against your company. This provides your business time to settle its debts. While your company’s management team will still maintain control, they may be required to get approval from the bankruptcy court.

During this time, many employees are able to remain working, receive pay, and receive benefits. However, some may need to be laid off.

Unpaid Wages & Vacation Pay:

You may be forced to lay-off some employees as a cost-cutting method. If this happens, those wages become one of the high priority debts that must be repaid. In addition to unpaid wages, any salaries, sick leave, commissions, severance pay, and vacation will be included as high priority claims.

This is only if these were earned within 180 days of the bankruptcy filing or when the company stopped operating. Keep in mind that secured creditors will be repaid first (banks or other financial providers). Your employees will have a cap per employee claim. The amount can be adjusted due to inflation, so be sure to speak with your attorney for this amount and how that will affect your case. 

If there are not enough funds to cover your employee claims, your employees may only receive a portion of their claim. The Fair Labor Standards Act (FLSA) does not cover claims for unpaid wages, so some employees may not receive anything at all.

Are your employees unionized? If so, there is a collective bargaining agreement that you will be unable to change without the approval of the bankruptcy court.

Retirement & Pensions:

Much like a Chapter 7, retirement plans are held separately from your company’s assets in a Chapter 11. In fact, they may not be used to pay your creditors. They may also be insured by a third-party entity that is not involved in the bankruptcy case. Thus, the assets of these retirement accounts will not be affected by the bank. 

On the other hand, the pension plans of your employees may not be paid in full due to there not being enough assets. However, the Pension Benefit Guaranty Corporation (PBGC) terms will determine the next steps. The PBGC was created to protect the pension plans and guarantee benefits for private sector workers that were earned before the plan was terminated. The best way to know if the PBGC covers the benefits of your employees is to review the pension’s summary plan description. Be sure to speak with your attorney to find out exactly what will happen to your employees’ pension and retirement accounts.

Health Benefits:

How this will be handled will depend on the summary plan descriptions. Your employees will want to contact your company’s health plan administrator or union representatives for more information. If it is discontinued, it will not be covered by COBRA. However, your employee will have the opportunity to convert the plan to an individual policy or join a spouse’s coverage. 

Need More Information?

There are other factors that could impact your case. So, it is important to speak with a qualified bankruptcy attorney before moving forward. Let us go over your situation to find the best possible solution for you. We believe in relationships that are based on trust. Before we work together, we would like for you to get to know us. We want you to be sure we are the perfect fit for you. This will make you comfortable sharing intimate and difficult details of your case. Call us today to set up a free consultation. You can also message us for more information and a member from our staff will get back to you shortly.