When a company files for bankruptcy, the media plasters photos of their “going out of business” signs and empty storefronts to announce that the company could be no more. What is not shown is the complex, often long process of actually filing for bankruptcy. Filing for bankruptcy also comes in different flavors and different factors may help employees’ situations. To give a general idea of how bankruptcy affects employees, below we’ll look at the types of bankruptcy as well as examine the additional factors that may change the outcomes for employees. All in all, the announcement of bankruptcy can be terrifying for any employee that is currently employed by that company, but by learning more about the process it can help employees make more informed decisions.
Beginning with types of bankruptcy, if a company files under Chapter 11, it means that the company may attempt to reorganize and continue operating under court supervision. In this case, the company may have to make difficult decisions such as reducing its workforce, closing unprofitable departments, or renegotiating contracts with suppliers and creditors. The company may also be able to negotiate with labor unions to reduce salaries or benefits temporarily. However, in some cases, employees may be able to keep their jobs or be rehired once the company emerges from bankruptcy.
Another potential filing is under Chapter 7 or where a company is liquidated. Liquidation means that a business’ assets will be sold to pay off its creditors. In this case, employees will likely lose their jobs, and the bankruptcy trustee will use the proceeds from the asset sales to pay any outstanding wages and benefits owed to them. This situation is not ideal, but there’s still another option.