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What Happens to Employees When a Company Goes Bankrupt?

I recently met with a prospective client whose company had given notice of her employer's impending bankruptcy. The individual was concerned about how the company's bankruptcy would affect her position, her unpaid wages, and her benefits plan.

If an employer begins experiencing financial trouble and files for bankruptcy protection, the first question for any employee to ask is what type of bankruptcy did the employer file; a Chapter 11 or a Chapter 7? A Chapter 11 bankruptcy will generally allow the company to continue operating after shedding some excess debt and operating costs. Under this type of bankruptcy, the company will usually retain a critical mass of employees to continue operations and take a close look at expenses to reorganize the company's financial affairs. Typically a Chapter 11 will have no direct impact on the payment of employee's earned wages. However, as a result of the bankruptcy, some employees may be laid off as a cost-cutting measure.

Distinctly, a Chapter 7 bankruptcy typically seeks to liquidate the company assets and end the company. With a Chapter 7, the organization is informing the court it is no longer able to meet its financial obligations and is dissolving the business. The bank will prioritize creditors into the order in which they are to be paid off. Employees who are owed wages become creditors of the bankrupt company and will share in the remaining company assets. With the exception of secured creditors, who are the highest priority, employees that are owed wages, salaries, or commissions are given a higher priority for repayment than other creditors. Currently, employees can receive up to $11,725.00 per employee for wages earned up to one hundred eighty (180) days prior to the organization's filing. In some cases, there will be sufficient assets to satisfy employee wage claims in full. However, sometimes only a portion of the wages are satisfied, and in extreme cases, there will be no compensation paid out at all.

While typical wage claims are regulated by the Colorado and U.S. Departments of Labor, claims for wages due to insolvency do not fall under wages protections from the federal and state laws unless the employer willfully failed to pay wages owed and filed for bankruptcy as an attempt to avoid paying wages. As a result, claims for unpaid wages as a result of employer bankruptcy are regulated by the U.S. Bankruptcy Code and fall under the jurisdiction of the U.S. Bankruptcy Court.

In any bankruptcy situation, if wages are unpaid for any period of time, the employee should apply for Colorado unemployment. The next most important step is to protect the employee's claim by filing a proof of claim with the Bankruptcy Court in the county where the bankruptcy was filed. The proof of claim is a single page form typically available online. Filing the proof of claim notifies the bankruptcy court of the employee's claim and intention to share in any distribution of assets to creditors. Filing of a proof of claim also gives the employee a right to object to any activity in the bankruptcy case that may affect the adjudication or valuation of the claim, and it helps assure that the employee is notified of the court's proceedings. Although employees are not required to have an attorney in order to file the proof of claim, a bankruptcy attorney should be consulted, as there are applicable filing deadlines.

Under either type of bankruptcy proceeding, any wages earned prior to the bankruptcy filing will remain a high priority among the company's debts to be paid. However, all other written employment agreements are up for renegotiation, including all benefits agreements. While a Chapter 11 bankruptcy may or may not affect employee's pension and health plans; pension and health plans will almost always be terminated in Chapter 7 liquidation. When an employer files for bankruptcy, an employee should contact the administrator of each plan to request an explanation of the status of the plan or benefits.

If you have a question about an employer bankruptcy or unpaid wages, contact us at www.BryanKuhnLaw.com/ to discuss your legal rights.

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