What Happens if an Employer Goes Bankrupt?

An employer bankruptcy differs from an individual bankruptcy in that it has an impact on others. Those who work for the company filing bankruptcy are often thrown into a state of concerns as they wonder what will happen to their job, health insurance and retirement accounts. Whether the employee is protected when an employer files bankruptcy primarily depends on what type of bankruptcy is filed.

Chapter 11

Chapter 11 is a bankruptcy primarily used by businesses. It allows the company a specified amount of time in which to restructure its debts and assets so it can repay creditors and not have to close the doors. Well known companies that have filed Chapter 11 include Blockbuster Inc. Border Books. When an employer files a Chapter 11 bankruptcy the company must continue to maintain employee retirement accounts, which remain protected from creditors. The company is, however, allowed to stop matching the employee contributions into the accounts.

The employer does not have to maintain health insurance and employees have no legal recourse other than to find private coverage or sign onto their working spouse's policy. If the employees are laid off as part of the restructuring or for any other reason, they have a right to maintain their health coverage for up to 18 months as long as they pay the monthly premiums.

Chapter 7

When the company files Chapter 7 and closes the doors, employee benefits are at risk. Health insurance ceases, but the employees are may be legally entitled to file for COBRA coverage. Qualifications are dependent on the number of employees. Retirement accounts will be dissolved and dispersed to the account owners. The owners must roll the funds into IRAs or other retirement accounts to avoid stiff financial penalties.

Wages

In Chapter 11, your wages are part of the restructuring plan and will continue to be paid. In the case of Chapter 7, your employer may not have enough money to pay any creditors, including employees, in which case you will not get your money. In all cases of bankruptcy, employee wages are considered a top priority. Once you know your employer has filed bankruptcy you can contact the bankruptcy trustee to file as a preferred creditor. This standing means the money the company has will be used to pay you before it is used to pay most other creditors. Employees come ahead of suppliers, landlords etc.

Unions

A unionized company filing bankruptcy follows the same pattern as a non-union company; however, if you belong to a union your union leaders will work with plan administrators to work out benefit dispersing and other issues. Keeping in contact with your union representative will keep you in the loop.

References

• Kiplinger: What Happens If Your Employer Goes Broke?
• US Department of Labor: Fact Sheet: Your Employer's Bankruptcy - How Will It Affect Your Employee Benefits?
• LATimes: Blockbuster files Chapter 11 bankruptcy exit plan, by Ben Fritz, September 23, 2010
• MSN.com: Advertise | AdChoices Borders files for bankruptcy, to close 200 stores 40-year-old book retailer will try to reorganize, close superstores Below: 1. * x Jump to vote Results below * vote 2. * x o Jump to video Borders seeks bankruptcy protection * video 3. * x Latest market data DJIA - Stock search * related * * Advertise | AdChoices Image: People enter a Borders bookstore NICHOLAS KAMM / AFP - Getty Images Bookseller Borders, which helped pioneer superstores that put countless mom-and-pop bookshops out of business, plans to close about 200 of its 642 stores over the next few weeks. Reuters
• Illinois Legal Aid:Someone Who Owes Me Money Filed for Bankruptcy