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  4.  » Can businesses discharge wage-related debts in bankruptcy?

Can businesses discharge wage-related debts in bankruptcy?

Business owners who experience a large uptick in operating costs or a sudden drop in revenue may have to make difficult decisions. Oftentimes, reducing their workforce and possibly even the number of locations that the company operates may be necessary if the organization hopes to regain financial solvency.

When business bankruptcy seems like the only viable means of getting rid of certain debts and righting a company’s budget, the organization will need to identify certain obligations to discharge and others that it needs to prioritize paying.

Worker wages are often dischargeable debts

Current bankruptcy laws give employers the option of reporting past-due wages owed to workers among their other debts when they file for bankruptcy protection. The individual workers can then make claims as creditors during the bankruptcy process. Each worker, at most, could make a high-priority claim for unpaid wages during the bankruptcy.

However, as of 2023, each worker could typically only seek up to $15,150 in wages regardless of how much they should receive. The wages owed to hourly workers in low-level positions will likely be eligible for full repayment, as $15,000 would represent many months of full-time work, and most employees will not continue working when they don’t receive a paycheck. For executives, salespeople and other highly-compensated professionals, a portion of what they hope to collect may be subject to discharge if the business’s bankruptcy is successful.

There is more than one solution for wage-related debt

In some scenarios where a company has unionized employees, it may be possible to negotiate a compromise with union representatives that allows for the partial repayment of wage debts in order to keep as many workers on the payroll as possible. Sometimes, organizations need to downsize and eliminate numerous positions and can then renegotiate arrangements with some of the workers that they hope to retain for their new, streamlined operations.

Even after an organization has filed for bankruptcy, there are still numerous possible solutions available to address specific debts, including wages still owed to workers. Seeking legal guidance to explore how a company’s bankruptcy can affect its finances can help executives to plan the best path forward for a struggling business.