What To Do if an Employer Bankruptcy is Looming

Employee benefit funds are often put in the position of pursing delinquent employers for unpaid benefit contributions.  If an employer is no longer interested in reaching a resolution of its debt, it may be considering bankruptcy.  Although an employer bankruptcy is frustrating, employee benefit funds may actually benefit from an employer filing for bankruptcy sooner rather than later.  This is because the bankruptcy code gives “priority” to debts for employee benefit contributions that arise from work performed within 180 days of the date the bankruptcy is filed.  This 180-day period is referred to as the “priority period.”

The bankruptcy code sets out the order in which a debtor’s debts must be paid.  This order applies regardless of the type of bankruptcy filed (i.e. Chapter 7 versus Chapter 11).  Priority employee benefit contributions are paid after domestic support obligations, trustee expenses, administrative expenses, secured claims, and priority wages.  Each priority level must be paid in full before the next level may receive payment.  Accordingly, where bankruptcy seems inevitable, it may be preferable for an employer to file for bankruptcy sooner rather than later, so that benefit contributions will fall into the priority period.

If an employer files for Chapter 11, which allows it to restructure under a plan and continue doing business, priority status is particularly important because in most cases, a Chapter 11 plan cannot be confirmed unless all priority claims are paid in full.  The same is true for Chapters 12 and 13.  Because those who file for bankruptcy are obviously unable to pay all their debts, it is important for employee benefit funds to fall within the 180-day priority period, if at all possible.

Employee benefit funds may also be able to “secure” the debt owed to the fund with property of the employer.  Secured creditors enjoy special rights to the property that has been used to secure the debt owed, as long as that property has value remaining.  It is possible to secure a debt with real estate, bank accounts, vehicles and accounts receivable, among other things.  Securing a debt should be done more than 90 days before the debtor files for bankruptcy in order to protect the secured interest.  If you have any questions regarding securing an employer’s debt, or regarding your options when an employer appears to be contemplating bankruptcy, contact your Trust Fund counsel as soon as possible.

By Jolene Kramer | August 21, 2013

Legal Developments