My Employer is Filing for Bankruptcy-What do I Need to Know?

Q. I am worried. My company has had financial problems for over a year and there have been rumors that the company is for sale, is going to close or is going to file for bankruptcy. When I thought the company was going to be sold, I decided to stay. Now I am kicking myself. Bankruptcy looks like it will be the company’s future. What happens to the employees? Will we get paid? Will I have any benefits? And can we collect unemployment?

A. All of your questions pose valid concerns and many companies have gone through significant financial distress impacting their workforce. Knowing what to expect and which documents you need can provide some support in a challenging time.

I consulted with Attorney Tal Unrad, an associate at the Boston office of Burns and Levinson, LLP, who explained, “A preliminary distinction to consider is whether the employer has filed for bankruptcy under Chapter 7 of the Bankruptcy Code (a liquidation) or Chapter 11 (a reorganization). When a company files for Chapter 11, the company is seeking to reorganize and will generally continue operating after it sheds some of its excess debt and operating costs (e.g. GM, American Airlines, UpperCrust Pizza). When a company files for Chapter 7, it is seeking to liquidate its assets and is pretty much at the end of the road.”


Attorney Unrad also noted that many corporate bankruptcies start as Chapter 11 reorganization cases, but where efforts are unsuccessful, they may ultimately be converted into a liquidation Chapter 7; proceeding overseen by a court-appointed trustee.

When a company is liquidated, jobs will most likely disappear. When operations cease, most if not all employees will be laid off. Employees may benefit from the Bankruptcy Code; wages employees have already earned are given a higher priority in terms of which company debts will be paid first. Employees can receive up to a cap of $11,725 per employee.

Employee pension and health plans will almost always be terminated in a Chapter 7 liquidation. How an employee’s pension assets and health benefits will be treated will depend on the documents governing the pension plan or health plan, also known as the Summary Plan Description. The Federal Employee Retirement Income Security Act (ERISA) protects pension assets. The Summary Plan Descriptions should provide some information about how pension assets and health benefits will be treated and will also provide contact information for the plan administrator.


When a company seeks to reorganize under Chapter 11, the company will usually continue to operate its business under the protection of the bankruptcy courts. Companies often retain a critical mass of employees to continue operations and are required to take a close look at expenses to reorganize the company’s financial affairs. As a result, a company in Chapter 11 bankruptcy may lay off some employees as a cost-cutting measure. As in a Chapter 7 bankruptcy, any wages earned prior to the bankruptcy filing will remain a high priority among the debts to be paid; however, all other written employment agreements are up for renegotiation, including all benefits agreements. In any bankruptcy situation, the employee should apply for unemployment as only the unemployment department can determine eligibility.


Overall, bankruptcy is never a good place for a company to find itself, but federal bankruptcy laws provide some protection to employees’ earned wages, pension assets and health insurance benefits.

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