Filing for Chapter 11 bankruptcy marks a challenging but hopeful turning point for many business owners. While this legal protection gives you room to reorganize, it brings up crucial questions about your ongoing responsibilities.
Among your most important concerns, paying your employees sits at the top.
Meeting your payroll responsibilities
The law requires you to continue paying your employees during Chapter 11. Your employees’ wages rank among the first debts you must pay—ranking over most other business expenses.
Skipping payroll could lead to serious problems. For example, the court may dismiss your case and force you to switch to business liquidation instead of reorganization.
Getting court approval for employee wages
Current employee wages usually get immediate court approval to ensure business continuity. Some wage-related payments require court approval before distribution:
- Back pay from before filing
- Bonuses and commissions
- Vacation or sick pay
- Employee expense reimbursements
- Severance packages
The court classifies employee claims differently based on when they arose.
Figuring out who gets paid first
Wages earned after filing receive administrative priority, so they get paid first. Pre-bankruptcy wage claims qualify as priority claims, ranking just below administrative expenses but ahead of general unsecured debts.
Employees laid off before bankruptcy may need to wait longer. The timing of dismissal and the type of compensation owed affect how quickly these claims receive payment.
Getting advance approval helps protect both you and your employees during the reorganization process.
Managing payroll after filing for bankruptcy
Start by making a detailed plan for your cash flow. Keep employee wages in a separate account to ensure the money stays available. Clear recordkeeping helps prevent payment issues down the road.
Moreover, work closely with your financial team or a financial professional to create a budget that puts your employees first while managing other expenses.
Creating a stable path for your team
Your employees remain crucial to your business recovery. Keep open communication with your team. They deserve to know where they stand and how you plan to continue the business.
Additionally, consider working with an experienced bankruptcy attorney to help you address all legal and financial concerns. With good planning and professional guidance, you can protect your employees while rebuilding your business.