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How Are Unpaid Wages Treated in Bankruptcy?

Insurmountable debt and bankruptcy cause stress for everybody involved. When it’s your workplace—an entire company filing for bankruptcy—the effect on your and your coworkers can be crushing. Your career takes a hit, and you lose your source of income and possibly even your health insurance. If your workplace suddenly files for bankruptcy, you still deserve payment for the work you did before and during the process. How are unpaid wages treated in bankruptcy, though? What recourse do you and your coworkers have to be paid for your labor? Let’s look at how those wages factor into your company’s bankruptcy and learn the steps you can take to ensure that you receive fair compensation.

Chapter 7 Liquidation

There are two main types of bankruptcy that a company can file, the first being a total liquidation. This is the type of bankruptcy you may expect—the company goes out of business, and you and your coworkers are laid off. Business assets are sold off (liquidated) to pay off all debts, including employees’ wages. All employees at the company then become creditors in the case. After all, your company owes you that pay. You and your coworkers can then file a claim asking for your unpaid wages. The bankruptcy estate (the folks handling the process) will pay off the claims in order of priority.

The case trustee is the person in charge of handling the finances in bankruptcy. When the company is liquidated and all assets sold, they use that money to pay out claims from employees. But they also need to use that money for administrative costs.

Secured priority claims, as the name implies, are paid out first. After that, the trustee pays the costs of administering the bankruptcy case. Then, they pay out unsecured priority claims—many employee claims for unpaid wages fall under this category. Finally, the trustee will pay out unsecured general claims. As an employee of the company (the debtor), you qualify for a priority claim for any wages lost before the petition for bankruptcy was filed.

Chapter 11 Reorganization

When a company decides to reorganize its business model in the process of bankruptcy, its goal is to keep the company afloat while handling the case. The best-case scenario is that they emerge from their bankruptcy on solid financial ground. During this process, some employees may keep their jobs and continue to receive wages, while others may be laid off. If you’re still an employee during the reorganization, the bankruptcy case shouldn’t affect your pay or benefits.

If you’re one of the employees laid off during this time, you become a creditor—the company is in debt to you for your labor. At this point, your company likely still does a lot of its own business management, but they must consult the bankruptcy court before making any major decisions. Those decisions may include shutting down some business locations and downsizing the number of employees.

Employee claims for all unpaid wages and other benefits take priority over other unsecured claims. The trustee or committee assigned to your company’s bankruptcy case is dedicated to paying out all unpaid wages prior to the date the bankruptcy was filed.

What Is an Automatic Stay?

When your employer files for bankruptcy, a short automatic freeze goes into effect, temporarily preventing anybody from filing a claim (with very limited exceptions) for unpaid wages. The company is entitled to a short amount of breathing room, so to speak, to get their affairs in order. If your employer has filed for chapter 7 bankruptcy (liquidation), that petition stops creditors from filing lawsuits or complaints until the company’s affairs are in order.

Between 21 and 40 days after your employer files that petition, the case trustee will arrange a meeting between the creditors (you and your coworkers) and debtor (your workplace). Creditors can then ask questions about the bankruptcy case and what’s going to happen to any liquidated assets. The debtor is required by law to answer those questions. If you do attend this meeting, talk to an employment law attorney about what the process will look like. Rossman Law Group has decades of experience with employment law; we fight tooth and nail for our clients to receive compensation for their labor.

Filing a Claim

If your unpaid wages are solely due to the bankruptcy filing and not deliberately withheld by your employer, then the U.S. Department of Labor doesn’t have jurisdiction. Any claim you file for bankruptcy-related unpaid wages will fall under the purview of the U.S. Bankruptcy Court.

Has your employer filed for chapter 7 bankruptcy? The company’s assets will be liquidated to pay off debts, including to employees. Contact the U.S. Bankruptcy Court clerk in the county where that bankruptcy was filed, and they’ll give you a “proof of claim” form to fill out.

To fill out the form, you’ll need some basic information:

  • The company’s name
  • The case number for the bankruptcy
  • The location (generally the county) where the bankruptcy was filed
  • The amount your employer owes you

If you have any additional documents supporting your claim, like proof of the amount your employer owes you, include those in your form as well. An employment law attorney can guide you through each step and prepare you for what to expect next. There is a cutoff date, called a “bar date”—you must file that claim before then or you may lose your right to that payout.

Unpaid wages don’t just disappear in the middle of a bankruptcy case. If your employer files for bankruptcy, take the initiative to seek out compensation for all the hours you’ve worked. Failure to do so may result in you never receiving those wages—so get ahead of the game and consult with an attorney as you navigate the process. When you know how unpaid wages are treated in bankruptcy, you can file your claim more confidently with the knowledge that you’ll see your payday eventually. Call Rossman Law Group today for a free consultation and top-tier legal advice.

How Are Unpaid Wages Treated in Bankruptcy?