What's Your Priority? Treatment of Owed Wages in Bankruptcy.

Frederick Perillo

The federal Bankruptcy Code gives workers a “priority” for wages and wage-like benefits such as sick leave, vacation pay, severance pay and so on. Things like WARN Act damages for plant closings are included in these sums.

This priority does not mean that wages are secured claims—they are not—nor are they first priority expenses as in the case of an ongoing business. They are fourth priority (fifth priority, for certain benefits such as retirement contributions or health care expenses). This means that they subject to the debtor actually having money to pay them. You don’t have an automatic lien on the debtor’s property for your wages and benefits.

They are also capped at $12,850 (this number is adjusted for inflation every three years—it was last adjusted on April 1, 2016). This priority applies to any wages you earned before the bankruptcy, within 180 days. Older debts – wages you earned more than six months before the bankruptcy—are treated like any other general claim, which means they are less likely to be paid in full.

In receivership in Wisconsin, the priority is much smaller, only $600. This limit was set many years ago, and was never adjusted for inflation, which is why it is much smaller than the federal wage priority.

Outside of bankruptcy, wages have no special status, and are treated like any other debt. Also, unlike the Bankruptcy Code, there is no orderly process to ensure that all claims are treated equally. It’s a “race to the courthouse” as to which creditor can find the debtor, sue and collect the delinquency.

If your employer is in bankruptcy, chances are it is insolvent, meaning that it has more debts than it can pay. If the employer has borrowed money from a major lender, such as a bank, there is a high probability that it had to pledge its property as security for the loan. In such cases, secured debts (which are similar to a mortgage) must be paid to the secured creditor before those assets can be used to pay wages or other debts.

If the employer has many assets and few secured debts, then creditors like wage-earners likely will receive something on their claims. The priority will then guarantee that workers will come closer to the front of the line of creditors seeking payment, at least up to the limit of the priority amount.

If on the other hand, if the employer has few assets that are not already pledged to a secured creditor, chances are that no unsecured creditor will receive anything, or will receive very little. The wage priority only guarantees that workers will come ahead of general unsecured creditors in the distribution of assets—it does not guarantee that the employer will actually have assets available to pay.