What Happens when a Company Files Chapter 11 in CA?
Before our Sacramento Chapter 11 lawyers explain what happens to employees and wages, let’s take a step back and begin with a brief overview of Chapter 11 bankruptcy in California.
Chapter 11 can be utilized by corporations, LLCs, partnerships, and in some cases, individual debtors. Unlike Chapter 7 bankruptcy, Chapter 11 allows business entities to continue operations and avoid closure while the bankruptcy is pending, making Chapter 11 an attractive alternative to Chapter 7 for business owners who wish to avoid liquidation of the company’s assets. Because business entities cannot file Chapter 13 in Sacramento — with some exceptions for sole proprietors, which a Sacramento Chapter 13 lawyer can explain — Chapter 11 is effectively the only feasible filing option for a Sacramento business owner who wishes to avoid shutting his or her company down.
Unlike Chapter 7, Chapter 11, similar to Chapter 13, involves the restructuring or “reorganization” of debts, which is where the phrase “reorganization bankruptcy” derives from. In addition to the petition for bankruptcy, the debtor also submits many other documents, such as disclosure statements and schedules of liabilities and assets.
After the debtor files the bankruptcy petition, he or she becomes a “debtor in possession” (DIP), and continues to manage the company. The bankruptcy court is unlikely to appoint a trustee to take over for the DIP, unless serious noncompliance, mismanagement, or fraud occurs.
The DIP must submit a reorganization plan, which must be approved by the court. The reorganization plan classifies each creditor’s “claim” (right to be paid), and specifies how and to what extent claims will be paid during the bankruptcy. The purpose of the plan is to rework the company’s debts, so that payments are reduced or spread out over a longer and more manageable payment period. The company may sell some of its assets to help raise money for the Chapter 11 payments. With foresight, strategic planning, and precise attention to detail, this allows the business to reestablish profitability over time.
Different rules and deadlines apply in Chapter 11 cases depending on whether the business entity is classified as a “small business debtor,” meaning a debtor who owes a maximum amount of $2,566,050. Our Sacramento small business bankruptcy lawyers can help you understand how your case could be affected by the size of your company, and what you will be required to do differently as a small business debtor.
Are Business Owners Required to Pay Employees During Chapter 11? Filing for Chapter 11 doesn’t mean the end of the business – in fact, just the opposite. However, bankruptcy can have significant impacts on daily operations, including the payment of employees. So how and when are employees paid during Chapter 11? How are unpaid wages treated in Chapter 11 bankruptcy? First and foremost, business owners should be advised that filing Chapter 11 does not dissolve, relieve, or alter the normal obligation to continue paying employees. If your company files Chapter 11, you are required to keep sending paychecks in the normal amount and at the normal time. If you fail to pay your employees while your company is in Chapter 11, several negative consequences can result:
The Department of Labor could investigate your business. This could lead to criminal prosecution.
The bankruptcy court could dismiss your case, or appoint a trustee to manage your company’s finances.
Your employees could simply quit, leaving your business in a precarious position precisely at the time when maintaining stability is critical to success. Employees who are laid off when you file Chapter 11, or before you file Chapter 11, will join your other creditors. Employee claims are generally classified as “priority” claims, meaning claims that are paid before others. This classification extends to any wages your employees earned during the 180 days prior to the date on which you file Chapter 11, up to an amount of $12,850. This amount is periodically adjusted for inflation. In this context, the term “wages” covers:
Paid Sick Leave