As Corporate Bankruptcies Mount, Employees Could Soon Follow

The novel coronavirus quarantine hit the service and retail industries the hardest with many strip malls, actual malls, retailers, and restaurants closing shop to avoid bleeding what little they had left. This has left their employees between a rock and a hard place.

One of the most difficult questions to ask when an employer goes bankrupt is, “How will this affect me?” You’re not going to like the answer.

You become your employer’s creditor 

When an employer goes into bankruptcy, all of their debts, including salary, vacation, and wages owed to employees are paused until the court can figure out a fair way to move forward. In some cases, this means employees, contractors, and vendors can be shorted for money they are owed. Essentially, anyone to whom the bankruptcy company owes money becomes the equivalent of a creditor. Since the case is already in bankruptcy, the bankruptcy court and trustee will determine how to proceed. In cases of Chapter 7 bankruptcy, the company’s assets are liquidated to repay creditors at least some of what they owe. In Chapter 11, the company’s assets become part of a bankruptcy estate and a trustee is allowed to make business decisions for the company.

Employees whose companies file for bankruptcy will get a notice, called a Notice of Filing, that indicates their employer’s intentions. The notice of filing is sent to all the employer’s creditors, including employees.

Debt precedence 

Debt precedence determines which debts are paid off. Secured debt is considered the most important, so that is paid off first. Plus, there are fees related to the bankruptcy itself that must be paid, and finally legal fees, including the trustee’s fees. Employment wages are considered priority unsecured debts, which means they go before vendors (and contractors) but under debts that are secured by collateral. Often, however, secured debts can be paid off by returning the collateral.

Chapter 11 versus Chapter 7 

In Chapter 7, all employees of the company are laid off. Since even Chapter 7 bankruptcies take a while to resolve, employees may find themselves without pay for a period of time. They can (and should) apply for unemployment benefits and immediately seek new employment while the bankruptcy case is being resolved. In Chapter 7, no one keeps their job after the company is liquidated.

Chapter 11 works differently. Some employees may be laid off and owed wages and they should pursue those in the same manner described above. However, other employees may retain their jobs and continue to work. Those who don’t become creditors and will have to wait until the bankruptcy is resolved to get their pay.

Talk to a Jacksonville Bankruptcy Lawyer Today 

The Jacksonville bankruptcy lawyers at the Law Offices of Carol M. Galloway help those in tight financial positions file for bankruptcy. Call our office today to discuss your situation in more detail and learn more about how we can help.