Business bankruptcies appear in the news so regularly that it’s easy to ignore them. However, when it’s your employer’s business that files bankruptcy, then it’s your problem. Here are some facts you’ll want to know.
First, it’s necessary to distinguish which chapter the business is filing in. Businesses can’t file in chapter 13, so that leaves chapters 7 and 11. These chapters function the same way for businesses as they do for consumer debtors, except that in chapter 7, after the business is liquidated it ceases to function as an independent entity. This is the worst-case scenario for workers because they’ll probably lose their jobs. If they’re lucky, another company might swoop in and buy up the division they work in and keep most of its workers, but that’s unlikely. Employees are better off looking for new work when problems start appearing.
Workers aren’t wholly without luck if their employer files in chapter 7. Although any money owed to them are unsecured debts, they are priority claims that must be paid by the bankruptcy estate before others. Section 507(a)(4) limits recoverable unpaid earnings to the 180 days before either the filing of the bankruptcy petition or the cessation of the business’ activities, and caps them at $12,850 (as of the 2016 bankruptcy dollar amount adjustments). The same goes for contributions to employee health benefit plans. Fortunately, workers are also due commissions, vacation time, unused sick days, and severance pay. Independent contractors must earn 75 percent of their income from the bankrupt business over the previous twelve months to qualify for priority claims to the bankruptcy estate.
Speaking of employee health and pension plans, these policies’ fates are determined by their governing documents, usually called a “summary plan description.” These documents will contain sections on the consequences of the plans’ terminations that workers should be aware of. The good news for defined benefit retirement plans is that they’re shielded from the business’ bankruptcy, so at worst those might be managed by the Pension Benefit Guarantee Corporation. Defined contribution plans, like 401(k) plans, continue to function on their own.
Chapter 11, which the public is most familiar with when it comes to business bankruptcies, is more favorable to a company’s workers than chapter 7. In chapter 11, the business reorganizes itself under court supervision to return to profitability. However, this process will include many uncertainties, like cost-saving layoffs, sales of less profitable business units, and renegotiation of employment, health, and pension agreements. If a company’s chapter 11 falters, it might convert the case to a chapter 7 liquidation. Readers can find out more about how chapter 11 works here.
The U.S. Department of Labor has a good Web site explaining what workers should expect when their employer files bankruptcy here. Business owners contemplating bankruptcy should read this post.
Sometimes workers do okay after a business bankruptcy, but in many cases, they lose their jobs. At that point a consumer bankruptcy might be worth contemplating with an experienced New York bankruptcy lawyer. My practice also helps debtors through chapter 11 cases.
For answers to more questions about business bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
