What Happens to Employees When Their Employer Files for Bankruptcy

Understanding how bankruptcy will affect your employees is crucial as you consider filing. Employees are entitled to certain protections and compensation that will affect the overall value and cost-cutting of either Chapter 7 or Chapter 11.

One of the more pertinent issues for a company considering bankruptcy, especially a larger company, is how the bankruptcy will affect the livelihoods of its employees.

A Chapter 7 or Chapter 11 bankruptcy will have different impacts on employees as the business goes through either liquidation (Chapter 7) or reorganization (Chapter 11).

How a Chapter 7 Bankruptcy Affects Employees

The court will appoint a Trustee to oversee the collection and liquidation of the company’s assets, including any benefits that were employee-held before the filing.

Employees should be able to hold on to any 401(k) or other retirement contributions they’ve made before the bankruptcy filing. Still, the business is not obligated to provide future contributions. The business could discontinue all health plans in a cost-cutting effort as well.

Some employees may continue to receive wages and other support to aid in the liquidation process. However, the eventual result of Chapter 7 is that the business will cease to operate.

How a Chapter 11 Bankruptcy Affects Employees

Businesses that enter Chapter 11 remain operational through the proceeding, so some employees may still work and receive wages. The company will reorganize its debt in the interest of the long-term solvency of the business.

Through this process, layoffs aren’t unusual as labor costs tend to be one of the businesses’ most expensive line items. Businesses with 100 or more full-time employees must still comply with the Worker Adjustment and Retraining Notification Act (WARN) requirements regarding providing 60-days notice of any mass layoff or shutdown.

In both Chapters, there are specific stipulations to what employees are and aren’t entitled to.

If you’re a business owner or leader considering a Chapter 7 or 11 bankruptcy, it’s important to understand all of your options and how they’ll affect your employees, whether one or a hundred. The professional team at Natural State Law can help advise you on the best path. Call us at (501) 916-2878 today to schedule a free consultation with one of our qualified bankruptcy attorneys.