Legal Question in Bankruptcy in Utah

Re: How is an unpaid Employee handled in a Chapter 7 bankruptcy?

Short answer -- If you are an employee of a company in Chapter 7 you are given certain rights as a creditor, but unfortunately I doubt you will receive your unpaid wages.

I assume from the question that your former company is in Chapter 7. As an employee who is owed wages you are treated as a creditor in the company's Chapter 7 case. The bankruptcy code has a somewhat elaborate formula to determine the "priorities" of certain kinds of creditors. These priorities determine which creditors if any receive payment. (These priorities are the same for an individual case as they are for a corporate filing but usually priorities are not an issue in an individual case since the individual has zero money to pay back creditors)

In a corporate bankruptcy (especially Ch. 11) there will often be enough assets and/or money to pay some creditors. Since the company filed under Chapter 7 there is probably not enough assets/money to pay all creditors.

Secured creditors will be paid first. Then the system of priorities kicks in. The first priority is given to creditors who are directly involved in the bankruptcy case; essentially lawyers, accountants, and the Trustee. The second priority is too complex for discussion in this context and it more than likely doesn't apply to your company's situation. You are a creditor in the third priority. A creditor owed wages earned within 90 days before the date of the bankruptcy filing is given a priority. This priority is limited to $4,000 for each employee. Anything earned beyond this amount is not entitled to a priority. In my opinion it would be miraculous if you received any money beyond the $4,000 priority.

Please understand THE CHANCES ARE NOT GOOD FOR YOU TO RECEIVE ANY OF YOUR UNPAID WAGES. I have given you a general overview of the process but as I indicated previously, if the company had sufficient money the company would have filed in Chapter 11. I'm sorry you are faced with this dilemma.

Re: How is an unpaid Employee handled in a Chapter 7 bankruptcy?

Assuming that it is your employer who has filed for Chapter 7 bankruptcy - wages owed to employees are considered priority debts. The trustee will liquidate all of the company assets, (if any) and then whatever funds he can obtain will be divided between the priority debt holders which include wages. Other priority debts are taxes, fines, bankruptcy fees, etc. The secured creditors get to take the property which is the security for loans, if there is much equity in such property the trustee may intervene to get some of the equity. Generally, smaller businesses which liquidate often have little or no cash, meaning that the wage earners often get little of their wages. Don't get your hopes up. Sorry.