Category Archives: Unpaid Wages and Bankruptcy

What Happens to Wages I Owe My Employees When I File Bankruptcy?

By Ryan C. Wood

In this economy many big corporations are struggling so it is not difficult to imagine that a lot of the small business owners are struggling as well.  Numerous business owners rely heavily on credit to ensure their daily business activities run smoothly.  What happens when the credit dries up and business is slow?  Some of these business owners make the financial decision to file for bankruptcy protection.  So what happens if you are a business owner that has decided to file for personal bankruptcy protection under Chapter 7 or Chapter 13 of the Bankruptcy Code but you still owe wages to your employees?

Wages owed to employees are considered a priority debt when you file for bankruptcy.  What does this mean? It means that not all creditors are equal.  Certain creditors have priority and would get paid first before other creditors.  It all depends on how much money is available to creditors.  The creditors would need to file a proof of claim first with the bankruptcy court in order to be paid.  It does not matter if the creditor is the first one in line and would be entitled to receive all the available funds if the creditor does not file a proof of claim.  The will not be paid if no proof of claim is filed.

If you file a Chapter 7 bankruptcy case, any assets that are not protected or exempted will be liquidated to pay your creditors.  If you file a Chapter 13 bankruptcy case, creditors get paid through the availability of funds in the Chapter 13 plan.  The Chapter 13 Trustee would pay the creditors based on the priority of the debt.

Wages, salaries, or commissions, including vacation, severance and sick leave owed to employees are considered very important and therefore have a higher priority than most creditors.  The caveat is that there is a limit on the priority amount.  Pursuant to 11 U.S.C. §507(a)(4), the priority amount is limited to $10,000 for each individual or corporation that is earned within 180 days before you file your bankruptcy petition or before your business ended, whichever occurred first.  Any additional amounts owed after the $10,000 are treated the same as a general unsecured creditor.   For example: you owe $15,000 in wages to a former employee.  $10,000 would be considered priority debt.  The former employee would get this $10,000 before any other creditors.  The former employee would be paid the remaining $5,000 at the same percentage as all other general unsecured creditors.  The percentage could range from 0% to 100%.  It depends on the availability of funds in the bankruptcy case.   If the debt is earned more than 180 days prior to the filing of the bankruptcy case, then the entire $15,000 is considered a general unsecured creditor and the debt would not be considered a priority debt.