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.

“You’re not likely to get stiffed,” says Thomas Salerno, an Ohio-based bankruptcy attorney with the firm Squire, Sanders & Dempsey. More often than not, he explains, companies have some money left over to pay back part of what they owe, and bankruptcy trustees charged with paying these funds must deal with debts that have “administrative priority,” such as owed wages.  

“Earned wages will have priority over and above any claims made by a creditor,” Mandelman says.

Wages that have not yet been earned but are promised through the WARN Act and unpaid sick days or leftover vacation, on the other hand, are not prioritized in the same way as earned wage claims.

“Bankruptcy code is interpreted differently depending on what jurisdiction you are in,” Salerno says, adding that what you’re ultimately paid depends on how a trustee divvies up the leftover money.

Still, no matter what the courts decide, retrieving wages after a company goes bankrupt is going to take a while, so employees need to be in it for the long haul. 

“Bankruptcy court does not move quickly,” Hancock says. “It’s not like the company goes bankrupt on Monday and you get a check on Friday.”

As for benefits like health care, Hancock says those too will likely end when the employee is laid off.

“They stop because there is no one who is paying the premium,” he explains.

Mandelman points out that employees laid off during a bankruptcy will still be eligible to sign up for extended health benefits through the Consolidated Omnibus Budget Reconciliation Act of 1985 or COBRA, a law giving people the right to keep their health insurance coverage for up to 18 months after being laid off, as long as they were originally under a group health care plan. Small business employees who were covered under self-funded plans, however, may not be so lucky.

The same rules apply to employer-sponsored 401(k) plans. Most of those funds are not likely to be affected by bankruptcy since they belong to the employee and not the company. But if the employer is behind in making its contributions to employee plans, then staff could lose out on the money that is owed to them.

One spot of good news is that employees who lose their job through bankruptcy will be eligible to collect unemployment.

“Anyone who is laid off is eligible,” Mandelman says.

For more on unemployment and recent job trends, check out these MainStreet articles.

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