Guiding business back on track.

Can you keep all your employees if you go into bankruptcy?

On Behalf of | Jan 28, 2022 | Business Bankruptcy

Companies sometimes go through hard times. Whether due to the economic downturn or other reasons, your company may be struggling and need bankruptcy to help it stay stable and profitable.

Many business owners try to avoid bankruptcy because they worry about how it will impact their business and employees. You may want to keep all your employees on staff, and that’s respectable. At the same time, you may need to cut costs. The labor force is a large portion of those.

Will you have to lay off or fire your employees if you choose bankruptcy?

It’s possible. For example, with a Chapter 11 bankruptcy, you will restructure your business. Part of that restructuring may be to lay off some of your staff members to save money. However, you can get creative with Chapter 11 bankruptcies, and you may find that cutting back in other ways allows you to keep your employees’ jobs. For example, you might sell off a few large pieces of equipment to pay back debts before entering into a repayment plan with your creditors. If you’ve saved enough money, then you might be able to retain all of your employees to keep the business running smoothly.

If you instead decide to enter into Chapter 7 bankruptcy, your employees will eventually be let go. While you may keep a few to help with the liquidation of your business, Chapter 7 bankruptcy shuts your doors for good. As a result, your employees will have to find a new job in the future.

If you have to lay off employees, unpaid wages should be a focus

While bankruptcies have specific rules on which creditors get paid first, if you owe unpaid wages to your employees, they’ll be given high priority. Secured debts get paid back first, then your employees. After that, unsecured debts, like credit card debt, is covered.

The amount of income paid out to employees is capped, which you should keep in mind. Let your employees know if you think bankruptcy is on the horizon, so they can begin to plan for the worst.