Paying Employee Debt With a Chapter 11 Bankruptcy

Many employers now are feeling the stress and financial strain of the economy and the economic impact of COVID-19. As a result, many employers are making the decision to file for bankruptcy. As a result, when an employer makes the decision to file for Chapter 11 bankruptcy they may have several questions regarding payment of prior employees or independent contractors. Does an employer have the right to pay these workers even if they are filing for bankruptcy? Wages for employees and independent contractors can be considered a “priority” debt in a Chapter 11 bankruptcy if an employer makes sure to prioritize the debts in their “adjustment of debts.” Learn more about your rights as an employer to pay your employees and workers below.

Understanding What “Priority” Means in Bankruptcy

There are certain debts of an employer in a Chapter 11 bankruptcy that will be given priority. Chapter 11 bankruptcies allow an employer to reorganize and restructure their debt in such a way that they have a longer period of time to make their payments. If a debt does not have priority status, it may be that the debt will not be paid at all, or only a portion of it is paid. Therefore, it is critical that an employer understand how to correctly prioritize and list their debts in a Chapter 11 bankruptcy.

Wages and Commissions as Priority Debts

Because the bankruptcy courts understand that an employer would want to make sure to pay workers first, in many cases wages and commission are given a status of priority debt under the following two conditions:

  • The commissions and/or wages were actually earned by employees and independent contractors within six months (180 days) of the employer filing the Chapter 11 bankruptcy, or by the date the business actually closed operations, whichever occurs first, and
  • The total amount is no greater than $13,650, which would include the cost-of-living adjustment of a total amount of $10,000.

As a business owner, you can control some of these circumstances, but possibly not all. You may not be able to control when an employee earns their wages, but you may have the ability to control the late date your company was open for business. If these two conditions are met, then the wages and commissions earned by your workers will be considered a priority debt in the bankruptcy filing and these debts must be paid first. As a result, you should take the time to consider whether or not you are able to pay all of your employees and independent contractors before you make the decision to file for bankruptcy.

Let Us Help You Today

If you are considering bankruptcy as a business owner there are a lot of serious decisions you will need to make in order to protect both yourself and your workers as much as possible. Make sure to protect yourself financially and legally by contacting an experienced business Jupiter bankruptcy attorney at the law offices of Julianne Frank, Esq. at (561) 220-2528 for a free consultation today.


United States Code, 2006 Edition, Supplement 5, Title 11 - BANKRUPTCY

Bankruptcy and Covid-19