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Bankruptcy doesn’t absolve you from paying employees

On Behalf of | Nov 23, 2023 | Firm News

While a daunting prospect, bankruptcy can be an opportunity for you to restructure your finances and keep your business or start afresh. However, amidst financial struggles, it is crucial not to overlook the valuable individuals who’ve stood by your side: your employees. Receiving wages for the effort they put in is within their rights. Any delays or refusal to pay salaries can lead to issues that exacerbate your current predicament.

The types of bankruptcy and its impact

Two types of bankruptcy that may be relevant to your business: Chapter 7 and Chapter 11, each offering different strategies for managing financial difficulties.

In Chapter 7 bankruptcy, your business will cease operations and liquidate non-exempt assets to repay creditors. This is an option when your debts are so high that running the business while satisfying financial obligations becomes unviable. When filing Chapter 7, any employees you owe wages become high-priority creditors.

Meanwhile, Chapter 11 bankruptcy can allow you to continue business as normal while repaying debts through reorganization or asset liquidation. It should not affect employee wages. However, part of your financial resolution may be to reduce the number of staff.

Meeting obligations amidst bankruptcy

Regardless of whether you opt for Chapter 7 or Chapter 11 bankruptcy, the obligation to pay employee wages remains. If an employee has provided services, they are entitled to compensation.

Filing for bankruptcy does not absolve you of all your problems. Other issues may ensue. For instance, liquidating assets under Chapter 7 does not guarantee that you will have enough funds to pay all owed wages. It may take opening a new business and waiting for it to become profitable before you can fulfill these obligations.

Similarly, reducing staff as part of a restructuring plan without a careful strategy could lead to employee complaints.

Facing bankruptcy while meeting your responsibilities as an employer is a complex process. During these challenging times, enlisting the guidance of a business lawyer could be a smart decision. Equipped with their legal acumen, you may have a better chance of avoiding potential pitfalls that may worsen your situation.