Corporate Bankruptcy Procedures

Chapter 7 bankruptcy involves the liquidation of a company's assets by a court-appointed trustee to pay off creditors in a strict priority order. This path effectively ends the business operations and is typically pursued when the company has no viable future. In contrast, Chapter 11 allows a business to reorganize its debts and continue operations under a court-approved plan. One critical component to understand immediately upon filing is the "Automatic Stay." This federal injunction immediately halts most collection activities, foreclosures, and lawsuits against the debtor. While this stops creditors from seizing assets, it also means employees cannot immediately sue for unpaid wages outside the bankruptcy court process. This form of Bankruptcy & Restructuring aims to revitalize the company, offering a potential future for employees and creditors alike by renegotiating terms.

The U.S. Bankruptcy Code grants employees a priority claim for wages, salaries, and commissions earned within 180 days before the bankruptcy filing or the cessation of business. This priority is capped at a specific statutory amount per employee, which is adjusted periodically for inflation to reflect economic reality. Additionally, contributions to employee benefit plans may also claim priority status, protecting essential retirement and health funds. It is also vital to distinguish these from "administrative expenses." In a Chapter 11 reorganization, wages and salaries earned after the bankruptcy filing are classified as administrative expenses. These claims hold an even higher priority than pre-petition wage claims and must generally be paid in full for the company to confirm a reorganization plan. This distinction ensures that employees who continue to work during the restructuring process are compensated for their ongoing labor, securing the workforce needed to keep the business viable. Understanding these specific rights is essential for employees to recover funds for Unpaid Wages effectively.

Employees must complete Official Form 410, Proof of Claim, and submit it to the U.S. Bankruptcy Court for the District of Columbia. It is critical to attach supporting evidence such as pay stubs, W-2 forms, and employment contracts to substantiate the claim amount and classification. The court establishes a strict bar date by which all claims must be filed to be considered for distribution. Failure to file accurate documentation by this deadline typically bars the employee from receiving any payout from the bankruptcy estate. Additionally, in Chapter 11 cases, the debtor files a "Schedule of Assets and Liabilities." If an employee's claim is listed correctly on this schedule and is not marked as contingent, unliquidated, or disputed, a proof of claim might strictly not be required, though filing one is always the safest course of action. However, in Chapter 7 cases, filing a proof of claim is mandatory to receive a distribution. Employees should not rely solely on the company's records, which are often disorganized during insolvency, but should proactively verify and assert their own claims.

A bankruptcy attorney represents employees in dealings with the bankruptcy trustee and the creditors' committee to ensure their voice is heard. They monitor the proceedings to object to any reorganization plans that unfairly disadvantage workers or fail to prioritize wage claims appropriately. Furthermore, counsel can assist in exploring alternative avenues for recovery, such as actions against corporate officers if fiduciary breaches occurred. Additionally, counsel can evaluate potential violations of the WARN Act (Worker Adjustment and Retraining Notification Act). If the bankruptcy leads to a mass layoff or plant closing without the required 60-day notice, employees may be entitled to back pay and benefits for the period of violation. These WARN Act claims can also assert priority status, adding another layer of potential recovery that requires skilled legal navigation. Securing Employment Litigation & Consulting services ensures that employees maximize their potential recovery during this difficult transition.