Paying Employee Debt With a Chapter 11 Bankruptcy
If you are an employer and considering filing a Chapter 11, you should know that you have the right to pay prior employees or independent contractors their wages even if you file for bankruptcy. The debt of wages can be considered “priority” debts in a Chapter 11 bankruptcy if an employer ensures that they correctly establish an “adjustment of debts” to prioritize the wages owed.
Understanding Priority in Bankruptcy
Certain debts may be given priority in a Chapter 11 bankruptcy where the debt is reorganized in such a way that the company may repay them over a longer period of time. If a debt is given priority in a Chapter 11 bankruptcy, the company will be required under the law to repay all of those debts in full. If a debt is not given priority status, only a portion of it may end up being paid, or it may not end up being paid at all. The debts that are given a priority status must be addressed in the reorganization plan given to the bankruptcy court, and the company must show how these debts will be paid in full otherwise the bankruptcy court will not approve the Chapter 11 bankruptcy.
Wages and Commissions
Most of the time, employee wages and independent contractor commissions are given the status of priority debt. A wage or commission to a former worker will be considered a priority debt if the following two conditions are met:
- The wages were earned within 180 days of filing the bankruptcy, or the date of the end of the company’s business, whichever occurs first, and
- The amount does not total more than $13,650, plus a cost-of-living adjustment of $10,000.
Some of these circumstances you may be able to control, as a business owner, and in some cases, you may not be able to control some circumstances. For example, you may not be able to control when an employee earned wages, but you may have been able to control what the last date of your company’s business was.
Under this law in the Bankruptcy Code, if the wages or commissions of your employees or independent contractors meet these two requirements, they are considered a priority debt. This means that the payment plan created by you and your attorney must pay these wages, otherwise, the bankruptcy court will not approve your repayment plan. Therefore, it is important if you are considering a Chapter 13 bankruptcy that you look at the wages and commissions you owe your employees to see if you will be able to repay those in full.
Let Us Help You Today
If you are a business and considering a Chapter 11 bankruptcy, you may be confused regarding the classification of the different types of debt you may have. Our West Palm Beach bankruptcy attorneys at Kelley Fulton Kaplan & Eller can help you understand how a Chapter 13 bankruptcy would impact your finances and which debts would be considered priority debts. Contact us today at 561-264-6850 for a consultation.