When your employer files for bankruptcy, your rights as an employee depend on which chapter the company filed and how quickly you act. Federal law gives unpaid wages and benefit contributions priority status up to a capped amount, protects money already deposited in your 401(k), may entitle you to 60 days’ advance notice of a shutdown, and preserves health coverage in some situations but not others. None of these protections pay out on their own. To collect what you’re owed, you have to file a claim with the bankruptcy court before a hard deadline.
The chapter matters at every step. A Chapter 7 filing means the company is shutting down and a trustee is selling off its assets to pay debts. A Chapter 11 filing means the company is trying to reorganize and stay in business. Jobs, health plans, and the odds of recovering unpaid compensation all turn on that distinction.
Unpaid Wages Get Priority, Up to a Cap
Under 11 U.S.C. § 507(a)(4), compensation you earned within 180 days before the bankruptcy filing (or before the business stopped operating, whichever came first) sits in the fourth-priority tier. That covers wages, salaries, commissions, severance, vacation pay, and sick leave.1Office of the Law Revision Counsel. 11 USC 507 – Priorities
The cap is $17,150 per employee for cases filed on or after April 1, 2025, and it holds until the next scheduled adjustment on April 1, 2028.2Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases Anything above that figure, or earned outside the 180-day window, falls into general unsecured status, which typically pays pennies on the dollar if it pays at all.
A separate priority under § 507(a)(5) covers contributions your employer owed to employee benefit plans, such as health insurance premiums or retirement plan contributions, using the same 180-day lookback.3Office of the Law Revision Counsel. 11 USC 507 – Priorities
Priority is not the same as being paid first. Secured creditors with liens on company property collect ahead of everyone. Trustee fees and other administrative expenses come next. Priority wage claims line up after those tiers but ahead of trade creditors and bondholders. In a Chapter 7 with little to distribute, even priority claims can go partially unpaid.
WARN Act Notice and Back Pay
If the bankruptcy triggers a plant closing or mass layoff, the federal Worker Adjustment and Retraining Notification (WARN) Act may require your employer to give 60 calendar days of advance notice. The law applies to employers with 100 or more full-time workers, and a mass layoff generally means at least 50 employees cut at a single site.4eCFR. Worker Adjustment and Retraining Notification Act
Filing for bankruptcy does not by itself excuse the notice obligation. An employer can shorten the 60 days only if a narrow exception applies, such as unforeseeable business circumstances, a faltering company actively seeking rescue capital, or a natural disaster, and even then the employer must give as much notice as practicable and explain the shortfall.4eCFR. Worker Adjustment and Retraining Notification Act
When an employer violates WARN, each affected employee can recover up to 60 days of back pay at your highest average or final regular pay rate, plus the value of lost benefits (including medical coverage) during that period.5Office of the Law Revision Counsel. 29 USC 2104 – Administration and Enforcement Note that unemployment benefits paid for the same weeks can reduce the WARN recovery, since courts sometimes offset the two.
Health Coverage After the Filing
COBRA lets you continue your employer’s group health plan for up to 18 months after a qualifying event like job loss, as long as you pay the full premium plus a 2% administrative fee.6U.S. Department of Labor. FAQs on COBRA Continuation Health Coverage for Workers That premium often feels like a shock because your employer was covering most of it before.
Here is the crucial limit. COBRA only works if the group plan still exists. In a Chapter 11 reorganization, the company typically keeps its insurance contracts in force to retain employees, so COBRA rights stay intact. In a Chapter 7 liquidation, the business usually cancels the policies on the way out. Once the underlying group plan terminates, there is nothing to continue through COBRA, and the right disappears.
The 60-Day Election Window
The plan administrator must send you an election notice describing your COBRA options, the monthly cost, and how to enroll. You have at least 60 days from receiving that notice (or from the date you would lose coverage, whichever is later) to elect.6U.S. Department of Labor. FAQs on COBRA Continuation Health Coverage for Workers Miss that window and you generally lose the right permanently. Watch your mail carefully during the proceedings because notices can arrive while everything else is chaotic.
Marketplace Coverage
Losing employer health coverage opens a Special Enrollment Period on the federal or state health insurance marketplace. You can report the loss up to 60 days before or 60 days after it ends and enroll in a marketplace plan during that window.7Centers for Medicare & Medicaid Services (CMS). Special Enrollment Periods Available to Consumers If the marketplace requests documents to confirm eligibility, you have 30 days to send them. Depending on income, premium tax credits can make marketplace coverage much cheaper than COBRA, which is worth comparing before you elect.
Any Health Savings Account balance is yours individually and is not part of the bankruptcy estate. Your employer’s creditors cannot touch it.
Retirement Money
Money in a 401(k) or similar defined contribution plan is generally safe. ERISA requires those funds to sit in a trust separate from the employer’s own assets, which puts them outside the reach of company creditors.8U.S. Department of Labor. Your Employer’s Bankruptcy – How Will It Affect Your Employee Benefits? Employer contributions that were actually deposited into the trust are equally protected.
Contributions That Never Made It to the Plan
The real risk is money your employer withheld from your paycheck for retirement contributions but never deposited into the plan trust. This happens more often than you’d think with companies in financial distress, and it may not be obvious until the bankruptcy is already underway. Pull your most recent plan statements and compare them to your pay stubs. If deductions don’t match what landed in your account, contact your nearest Department of Labor Employee Benefits Security Administration (EBSA) regional office to report the discrepancy.8U.S. Department of Labor. Your Employer’s Bankruptcy – How Will It Affect Your Employee Benefits?
Outstanding 401(k) Loans
An outstanding 401(k) loan at the time of the bankruptcy can turn expensive fast. If the plan is being wound down and you can no longer make repayments, the remaining balance is typically treated as a distribution. That means income tax on the unpaid amount, plus a 10% early withdrawal penalty if you’re under 59½. Rolling the rest of your balance into an IRA or a new employer’s plan as soon as you can limits further damage, but the portion treated as a distribution cannot be rolled over.
Traditional Pensions and the PBGC
If you have a traditional (defined benefit) pension, the Pension Benefit Guaranty Corporation is a federal backstop. When an employer’s pension plan is underfunded or terminates during bankruptcy, the PBGC takes over payment of basic benefits up to the agency’s annual limits.9Pension Benefit Guaranty Corporation. Understanding Your Pension – PBGC Coverage The PBGC does not cover 401(k)s or other defined contribution plans. If your employer enters liquidation and you have a pension, contact the PBGC directly to confirm your plan’s status.
Filing a Proof of Claim
Priority status means nothing unless you file. To recover unpaid wages, benefits, or any other amount the employer owes, you need to submit a Proof of Claim to the bankruptcy court using Official Form 410, available on the United States Courts website.10United States Courts. Proof of Claim
Add up everything the employer owes: gross wages (including taxes that were withheld but never remitted to the IRS), unpaid bonuses, accrued vacation, commissions, and severance if any was promised. The form asks you to identify yourself as the creditor, give the bankruptcy case number, describe the basis of the claim, and state the total. It has a priority checkbox where you claim up to $17,150 under § 507(a)(4).11United States Courts. Official Form 410 – Proof of Claim
Attach every piece of supporting evidence you have: pay stubs, your employment contract, commission agreements, written promises of severance, and any correspondence about unpaid compensation. Vague or thinly documented claims invite objections from the trustee or the debtor, which creates delays and can shrink your recovery.
The Bar Date
Every bankruptcy case has a bar date, which is the absolute deadline for filing claims. Miss it and your claim is almost always permanently barred, no matter how valid. The court usually mails notice of the bar date to known creditors, but confirm it yourself through the court’s electronic docket system rather than relying on a mailed notice to find you. Many courts let you file electronically without a lawyer. Certified mail works too and creates a delivery record.
After filing, check that your claim shows up on the court’s claims register and keep watching the docket for objections. If the trustee or debtor challenges your claim, you may need to respond with more documentation or appear at a hearing.
Unemployment and Taxes on What You Collect
Losing your job because of an employer bankruptcy qualifies you for state unemployment insurance in every state. File with your state agency as soon as possible after the layoff, since most states impose a one-week waiting period before benefits begin. The employer’s bankruptcy does not reduce your eligibility or your weekly amount, though a bankrupt employer that fails to respond to the state’s verification requests can slow down the initial processing.
Any wages paid to you through the bankruptcy process remain taxable. The trustee or debtor-in-possession is required to withhold federal income tax, Social Security, and Medicare, and must issue you a W-2 for payments made through the estate.12Internal Revenue Service. Publication 908, Bankruptcy Tax Guide Keep records of every payment and every tax form you receive. If the company’s payroll records are incomplete, your own pay stubs and bank statements become the backup you need to file an accurate return.