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What happens to a company’s employees during a business bankruptcy?

On Behalf of | Dec 31, 2020 | Business Bankruptcy |

You hate to admit it, but your business has been tanking for a while. This past year appeared to be the final nails in the coffin. But what bothers you the most is your employees. Can you continue to pay them during your bankruptcy process?

Much of your employees’ fate depends on the type of business bankruptcy that you file. Let’s examine two of the most common types of business bankruptcies: Chapters 7 and 11.

Chapter 11

This type of bankruptcy allows a business owner to restructure the company and salvage what is still commercially viable. It is likely that some employees will need to be laid off, perhaps permanently. But because the doors of your business will remain open, you will still need a core staff to run the company.

Those employees will of course have to be paid as a normal expense of doing business. Trimming the fat can help you streamline your payroll expenses so you can keep essential employees working and paid.

Chapter 7

This is a liquidation bankruptcy. When filing for Chapter 7 business bankruptcy, your employees who are owed unpaid wages or paid time off, sick days, vacation days, etc. unfortunately become just another subset of creditors. 

These employees may never get paid because as unsecured creditors, they will have to wait until all the secured creditors are paid. In fact, it is quite likely that there will not be enough cash left from the liquidation process to pay them.

What an employer can do when facing bankruptcy

The kindest thing that you can do for those employees who will not be getting paid is being honest with them. Pink-slip them so the process of applying for unemployment is as seamless as possible. Don’t allow them to rack up work hours for which they will never see payment. Keep in mind that it is likely they know that the company is in precarious shape, anyway. They have likely been waiting for the axe to fall.