Employee Claims and Bankruptcy

 We have seen an uptick in the number of employees or former employees of bankrupt companies that seek help filing “proof of claim” forms.
An employee who has been terminated either before or after the date that his employer has entered into bankruptcy should be careful to apprise himself of exactly what his rights are under bankruptcy law. 
As a starting point, an employee, is almost inevitably going to be an “unsecured” creditor, and, generally, unsecured creditors get poor treatment in a bankruptcy. (A secured creditor is one who may have a lien, such as a mortgage, against an asset of the bankrupt estate, and therefore receives preferred treatment.)

However, more fortunate unsecured creditors are said to have “priority claims” against the bankrupt debtor. Employees of a bankrupt company frequently  fall into that category and have such priority claims.

Specifically, employees who continue to work for the bankrupt employer after the date of the bankruptcy (this means generally only an employee of a “restructuring” company) have the ability, to the extent that their work benefited the bankrupt company, to claim that  post-petition wages and other amounts due to them are an “administrative” expense of the estate.  Creditors who hold claims for administrative expenses generally have those expenses paid in full before any of the other unsecured creditors receive anything.  Thus, employees who work on after the date of the bankruptcy are given favorable treatment under the Bankruptcy Code.

Employees whose employment is terminated on or before the date of bankruptcy get less favorable treatment; however, they are entitled to a lower order “priority claim” that often allows them to receive at least partial payment for unpaid compensation before most of the other unsecured creditors.  Specifically, an employee whose job is terminated on or before the date of the bankruptcy (or the cessation of the employer’s business) is entitled to recover claims up to the amount of $10,950 for wages, salaries, commissions, accrued vacation pay, accrued severance pay and sick leave pay that was earned within 180 days prior to the date of the bankruptcy.

Finally, there is a similar priority claim for unsecured claims of an employee for contributions to an employee benefit plan that arise from services rendered within 180 days before the date of the filing of the petition.

Because priority claims at any one level are paid in full before priority claims at the next lower level, and because all priority claims must be paid before any general unsecured creditors are paid, it is vital that an employee’s claims are properly described on the proof of claim form.  Often, properly describing an employee’s claims is the difference between getting at least something for the employee’s time and effort and getting nothing. 
 Rod Fluck


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