What Happens to Employees When Filing Business Bankruptcy?

filing business bankruptcy

What Happens to Employees When Filing Business Bankruptcy?

filing business bankruptcyImagine the following scenario – you’re a worker in a small company and you suddenly find out that it has declared bankruptcy. Alternatively – imagine that you’re a business owner and you want to go through a bankruptcy filing. What are your obligations towards the employees? Do certain payments have to be made?

Unpaid Wages and Bankruptcy Filing

Probably the most important question focuses on the fate of unpaid wages after a bankruptcy filing in Arizona.

The type of bankruptcy filing will be determining.

In the event of a Chapter 11 filing, company assets and property will have to be sold off for the purpose of paying debt. In a sense, it’s a reorganization bankruptcy similar to a Chapter 13 filing for individuals. Regardless of the reorganization, the business will continue operating as usual. This means that employees will receive their wages after the bankruptcy filing.

Chapter 7 bankruptcy, on the other hand, is a liquidation proceeding.

A dissolution of the business will have to take place since the entity is no longer capable of handling its finances and paying to creditors. Whenever a corporate Chapter 7 filing takes place, the court prioritizes the needs of creditors. Unpaid wages are considered debt, which means that employees are classified as company creditors.

The prioritization of creditors will determine the order in which they’ll get paid from the bankruptcy estate. Employees share the assets after the liquidation with all of the other company creditors.

Other Effects on Employees

Unpaid wages, however, are not the only consideration for people who work in a bankrupt company.

Retirement planning is also an important part of being employed. When a company declares bankruptcy, you will have to make sure that payments made to the retirement plan have been communicated with the bankruptcy trustee and the respective insurance company.

Contributions to a retirement plan should be separated the company assets. Company assets are the subject of creditor claims. Contributions to retirement plans are not. All of the payments that the company is obliged to make on your behalf should have been transferred to a separate account and there should be financial documents establishing the timeframe and nature of such transactions.

Keep in mind that upon the finalization of the bankruptcy, employees are automatically 100 percent vested in the amount that the company contributed to their retirement plan (even if they would have been entitled to a smaller percentage under other circumstances).

Effects on the Job

Finally, we need to examine the overall employment effect of a company declaring bankruptcy.

Chapter 11 proceedings are reorganizational. The company will remain operational, which means that workers are not going to be losing jobs as a direct consequence of the filing.

Under Chapter 7, a company will cease to exist. This means that workers will be terminated. Luckily, Arizona law protects the rights of such workers. The regulatory framework states that people who have been terminated due to causes beyond their control have to be given unemployment benefits.

Unemployment compensation is paid by the government and these sums are sourced from Arizona state or federal payroll taxes. To be eligible for unemployment benefits, however, workers will have to meet certain requirements.

The most common requirements for receiving unemployment benefits include having been a full-time worker and being employed by a company that does pay the Federal Unemployment Tax Act (FUTA).  Part-time, temporary and remote workers will not be covered under the arrangement.

Unemployment benefits are determined on the basis of wages earned over a specified time period. These will be used to calculate the period during which the compensation will be provided and the amount of the benefit.

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