What Happens to Employees When a Company Files for Bankruptcy?

United States legal documents focused on Chapter 7 Bankruptcy.
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When a company files for bankruptcy, what happens to employees depends on the type of bankruptcy that was filed. While any of these instances can be devastating news for employees, there are some steps that can be taken to be better prepared.

According to SHRM, an employer’s bankruptcy will generally take one of two forms: reorganization under Chapter 11 or liquidation under Chapter 7 of the U.S. Bankruptcy Code.

City Bar Justice Center explains in a guide that in a Chapter 7 bankruptcy, the company stops its operations and goes out of business. In turn, employees are laid off, and those who are owed wages and benefits become creditors.

The proceedings can take a long time and laid-off employees should immediately apply for temporary benefits, such as unemployment insurance, and seek new employment, according to the City Bar Justice Center.

On the other hand, with a Chapter 11 reorganization, usually, the debtor remains “in possession,” has the powers and duties of a trustee, may continue to operate its business, and may, with court approval, borrow new money, the website for the U.S. Courts explains.

This usually means the organization will continue normal business operations under the protection of the court until the time it is able to resolve its financial affairs, according to SHRM.

Secured creditors are typically given the highest priority for repayment, then creditors who are owed wages are given a higher priority for repayment than other creditors, SHRM explains.

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“Each individual employee of a bankrupt employer is given a priority of $15,150 (as of April 2022, adjusted to inflation every 36 months) of all wages, salaries or commissions the employee earned up to 180 days prior to the organization filing for bankruptcy. In some cases, there will be sufficient assets to satisfy employee claims in full; in others, employees may be compensated for only a portion of their claims or receive nothing at all,” SHRM added.

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