You're Now More Likely to Be Paid More Back Wages by Your Bankrupt Former Employer

 Posted on March 14, 2016 in Bankruptcy Law

Here’s an adjustment in the law that can benefit you if you are owed wages and/or benefits by a person or business filing bankruptcy.

This is the last of a series of blog posts on the effect of changes going into effect on April 1, 2016. These changes are a result of a cost of living adjustment that’s in the federal bankruptcy law. See Section 104(b) of the Bankruptcy Code.

Every one of these blog posts so far have been about these changes would affect you if you were filing a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” But today’s blog post assumes you’re on the other side of the table, that you are owed money—in the form of back wages and employee benefits—by a former employer that filed bankruptcy.

In this situation you are a creditor of the person or business owing you the wages and/or benefits. But the good news is that you are a creditor who the law treats relatively well. Plus the April 1 cost of living adjustment means that such debts for wages and/or benefits are going to be treated even slightly better.

Priority Debts for Wages and Benefits

In bankruptcy law a few very select debts are considered “priority” debts that the debtor must pay in full before other unsecured debts are paid anything. Debts for unpaid wages and/or employee benefits meeting certain conditions are “priority” debts. This means that these are much more likely to get paid. (See Sections 507(a)(4) and (5).)

Even better, “priority” debts must be paid by the debtor in a particular order. So the higher priority ones must be paid in full before lower priority ones are paid anything. Among the highest priority debts are those for employee wages and benefits.

In many cases wages and benefits are the highest priority debts that a debtor owes. If the former or current business owner filing bankruptcy is an individual, instead of a corporation, usually only child and/or spousal support arrearage debt, if there is any, has a higher priority.

So if there is any money being distributed to creditors, there’s a good chance that your wage and/or benefits claim will be paid, at least in part.

Not All Wage/Benefits Debts Are Included

For a wage/benefits debt to be given “priority” status you must have earned the wages and benefits within the 180 days before the employer filed bankruptcy. Or if your employer went out of business before filing bankruptcy, you must have earned the wages/benefits during the 180 days before the going out of business.

There’s one more condition, which is where the April 1 cost of living adjustment comes in. There is a cap on the dollar amount of wages and benefits earned during the applicable 180-day period that would be treated as “priority.”

On the wage side that cap has been $12,475 for the last 3 years. It is going up to $12,850. See this announcement in the Federal Register of 2/22/16.

On the employee benefits side, the same dollar amounts apply—$12,475 in benefits earned during the 180 days either before filing or before close of business, going up to $12,850. But here there’s a twist. These amounts that are treated as “priority” are reduced by whatever others amounts are already being paid by the debtor to former employees in wages and other benefits.

“Priority” and “Non-Priority” Wages and Benefits

Any wages/benefits earned outside these 180-day windows or beyond the cap amounts could well be considered a valid debt. Such debts may even be paid in part or even in full in the former employer’s bankruptcy case. But they would not be paid as “priority” debts.

The “priority” portion of the debt would have a much, much better chance of being paid than any “non-priority” portion. Again, that’s because that “priority” portion would be at or very near the head of the line to be paid. In contrast, the non-“priority” portion of the wage/benefits debt would be in the pack with virtually all the other debts. That portion would only be paid if and to the extent there is any money left over after other more important debts are paid.

Conclusion

Regardless what kind of bankruptcy your former or current employer has filed, your back wages and benefits are much more likely to be paid if they fit the conditions for being “priority” debts. But that’s still not a sure thing. If you haven’t already done so, talk with an experienced bankruptcy attorney to understand your rights and to find out what you need to do to get paid.