What Happens to Employees When a Business Files for Bankruptcy?
News of a company’s bankruptcy is understandably nerve-wracking for its employees. However, a bankruptcy filing doesn’t automatically mean that every employee is out of a job. It largely depends on the type of bankruptcy that was filed.
If a company files for Chapter 7 liquidation, it no longer intends to operate its business. The assets will be sold to pay off the creditors. It’s possible that some employees will be temporarily retained to assist with the liquidation process. However, all employees can expect to lose their jobs once this process is complete and the company is disbanded. If a company files for Chapter 11 reorganization, it still intends to operate. Chapter 11 enables the company to reorganize its debts, protect its assets, and enter into negotiations with the creditors. Employees who work for a company in Chapter 11 have cause to be cautiously optimistic.
An employee who continues to work for a company that has entered into Chapter 11 reorganization can expect to continue receiving paychecks. The situation can get trickier if an employee is laid off before or after the bankruptcy petition was filed. If the employee is owed back wages, he or she will automatically be considered a creditor. This means the employee might not receive all or some of the owed money. If the employee does receive compensation, it will not be paid right away. The good news is that employee wages are considered priority claims, which means they are given priority over other types of debts the company owes.
The veteran bankruptcy attorneys at the law firm of Mesch Clark Rothschild have worked on bankruptcy cases across the U.S. and right here in Arizona. While negotiations are the preferred method of achieving business reorganization, our attorneys will not hesitate to use litigation to achieve objectives. Call our law firm in Tucson at (520) 624-8886 to discuss your situation.