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What happens to employee wages in business bankruptcy?

On Behalf of | Sep 22, 2020 | Chapter 11 |

One of the primary concerns of some business owners when they need to file for bankruptcy is what will happen to the employees. Sometimes these employees have been with them for years and have helped build the company. They might be worried that the employees won’t get the pay they are due.

Whether the employees are paid the wages they are owed or not depends largely on the type of bankruptcy the business has to file. They will typically be paid if the bankruptcy is a Chapter 11, but there’s more of a chance they’ll go unpaid in a Chapter 7. This is because the debts are likely reorganized in the Chapter 11, but assets are liquidated in a Chapter 7 to pay off what debts can be paid.

When a business files for bankruptcy, the debts are covered in a specific order. Government debts must be handled first. Secured debts are handled next. Because employee wages are considered unsecured debts, they come last after those other types of debts.

Employees who are working for a company that’s filing Chapter 7 should be warned that they will likely need to file for unemployment and other assistance programs because there’s a good chance they won’t get paid for the hours they worked or any paid time off or vacation time they’ve accumulated.

Any employer who’s considering filing for bankruptcy should be upfront with their employees about the future of the company. This must be balanced carefully because of the legal proceeding, so it’s best to discuss everything with your attorney if you’re facing this reality for your business.