Suppose a company owes seven months of unpaid wages to its employees but can't afford to pay any of it.
If the company declares bankruptcy and liquidating the company doesn't produce enough money to pay all of the wages, would the remaining wages simply be forgiven?
Chapter 7 Bankruptcy Attorney
Wages have a higher priority than other debts. If the company has any assets to be liquidated in bankruptcy to pay its creditors, wages are paid first before any ordinary creditors get paid.
But paying the wages isn't based on a "first come, first paid" basis. They are paid on a pro-rata basis. Say the company owes a total of $10,000 in wages to 10 employees but only has $5,000 after its property has been liquidated. So the bankruptcy court will pay all 10 employees 50 cents on the dollar or $500 each.
And yes, the balance owed to the employees is discharged or "forgiven". Who else is there to pay it?
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Chapter 11 Bankruptcy Attorney
As discussed in the previous response, wages will generally have a higher priority than many other debts, if proceeds are available to make distributions. However, this higher "priority" of wages is limited to $10,950 and only on account of wages earned during the 180 days before the filing of the bankruptcy case. If more than $10,950 was earned within the 180 days, those claims will be treated as general unsecured claims on par with regular unsecured creditors. In addition, wages earned before the 180 days will also be treated as general unsecured claims on par with regular unsecured creditors.
In order to preserve the right to payment it may be necessary to take action in the bankruptcy case, including filing a proof of claim.
Mr. Traurig is a bankruptcy attorney licensed to practice in New York and New Jersey. His response here does not constitute legal advice and does not create an attorney/ client relationship. The response is in the form of legal education and is intended to provide general information about the matter in question. Many times the questioner may leave out details which would make the reply unsuitable. Mr. Traurig strongly advises the questioner to confer with an attorney in their own state to acquire more information about the specifics of their case.