Will Employees Be Paid When a Company Declares Chapter 7 Bankruptcy?

Most employees know when their company is in financial trouble. Whether it's the uptick in management meetings or the worried look on a supervisor's face, it's rarely a shock when a company announces it is closing its doors for good. That said, it still puts the employees in treacherous waters. Facing unemployment, employees may wonder how much their company owes them in regard to wages during and after the bankruptcy.

What Is Chapter 7 Bankruptcy?

There are several types of bankruptcy a company can file, but the two most common are Chapter 11 and Chapter 7. In a Chapter 11 bankruptcy, a company seeks legal relief from its debts while the company tries to reorganize. The relief usually comes in the form of either complete debt relief (the debts of the organization are zeroed out), or a payment plan is crafted so that creditors receive at least partial payments while the company continues to operate. However, with a Chapter 7 bankruptcy, a company ceases operations and sells off its assets (referred to as liquidation), and those funds go to its creditors.

The Difference for Employees

During a Chapter 11 restructuring, some employees could be terminated or laid off, but since the business is still in operation, at least some employees will continue to work and receive wages. In the event of a Chapter 7 bankruptcy filing, employees become creditors if they are owed any wages. For example, if a business declares Chapter 7 and closes in the middle of a pay period, they still owe their now former employees for those hours worked but not paid. This also includes vacation pay, sick pay or any other accumulated time for which the employee has not been paid.

Will Employees Receive Any Wages Owed?

There are several levels of creditors in a bankruptcy, and these levels are used to determine who is paid first out of the bankrupt business's assets. Secured creditors such as the government are paid first. Past due wages and benefits are unsecured debt, and these debts are paid from what proceeds remain after secured creditors are paid. Unpaid employee wages and benefits are considered priority unsecured debt, meaning they are the first of the unsecured debts that are paid. However, since a company's assets are liquidated, an employee should not count on receiving any of the past due wages owed to him. The best practice is to start looking for alternate employment as soon as possible and apply for unemployment compensation.

 

About the Author

K.A. Francis is a freelance writer with over 20 years experience, and a small business consultant and jewelry designer. She holds a Bachelor of Arts in English and business administration and a Master of Arts in Adult Education. She has written for "The Einkwell," "Windsor Parent," MomsOnline, Writer's Stew, Lighthouse Venture Group and others. Her jewelry design company, KAF Creations, has been in operation since 1998.