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What happens to a company after filing?

If you’re a small business owner in New Jersey, filing for Chapter 11 bankruptcy is a daunting prospect. Because Chapter 11 allows for a reorganization of debt it doesn’t necessarily mean that your business is lost forever. The Balance offers the following explanation so you can understand your options when it comes to getting your business finances in order.

Layoffs may occur

One unfortunate aspect of Chapter 11 is that a company owner may need to make cuts to his or her workforce. This is because the expense of paying employees and offering benefits is usually the highest for businesses, so it stands to reason that some layoffs would occur. Depending on the specifics, layoffs can even involve union workers if a company is unable to renegotiate their contracts after filing.

Existing employees must still be paid

Because Chapter 11 involves debt reorganization most businesses continue operating. This means the existing employees must be paid as usual, and most courts grant permission to continue paying remaining workers. Those who’ve been laid off and are still owed wages become creditors in a sense and the court determines which creditors take priority over others. Most courts agree that back wages constitute a priority debt, which means they will be paid first.

Businesses must make 401(k) proceeds available

Additionally, a business can’t refuse to payout 401(k) proceeds even when filing for bankruptcy. Any money that’s already been funded is the employee’s and he or she can decide whether to keep it invested or remove it. However, a business does not need to contribute to proceeds under bankruptcy laws.


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