Your Company Went Bankrupt: Now What?

NEW YORK (MainStreet)  –  In the past year, Blockbuster, Borders and Sbarro all filed for bankruptcy, causing many to lose their jobs and countless others to speculate whether they would be protected if their company met the same fate.

Fortunately, employees have some protections afforded to them. When a company files for bankruptcy, the court appoints a trustee, often an attorney, to oversee the liquidation of assets during a Chapter 7 filing, or a corporate restructuring during Chapter 11, which strives to keep the company afloat while it pays its creditors.

“In the case of a Chapter 11, the company is going to stay in business so it needs to keep its employees,” John Hancock, a Detroit-based employment attorney with Butzel Long, tells MainStreet. Those who will keep their jobs will likely continue being paid, and those who will be let go in the future due to downsizing will receive notice because they are legally entitled to it.

The Worker Adjustment and Retraining Notification Act (WARN) requires that companies with 100 employees or more notify staff well in advance before shut downs or layoffs. The federal version of this law requires that notice be given 60 days in advance, but some state statutes are even stricter. New York, for example, requires at least a 90-day notice.

According to Marc Mandelman, a New York-based employment lawyer with the firm Proskauer, any company that falls under the WARN Act umbrella and fails to provide advance notice of layoffs could be legally held responsible for paying out severance for the 60 or 90 days, as specified by the law.

But here’s the catch: Companies filing for bankruptcy are doing so to eliminate debt and severance packages earned through the WARN Act can get lost in the liquidation. So employees who are due money for hours already worked (as well as employees who are technically entitled to severance packages) could still lose the money that was supposed to be on their next paycheck.

Fortunately, a loss of all wages only happens in the most extreme cases.