What Employees Are Owed When an Employer Files for Bankruptcy
Unpaid pay, 401(k) money, pensions and health coverage each follow different rules when an employer goes bankrupt. The priority cap, first-day wage motions and where to file.
When an employer files for bankruptcy, unpaid wages, vacation, severance and commissions earned in the 180 days before the filing are a priority claim up to $17,150 per worker, as of the adjustment effective April 1, 2025. Amounts above that cap are general unsecured claims. Your 401(k) account is held in a separate trust and is not company property.
The priority rule is in 11 U.S.C. 507(a)(4) of the Bankruptcy Code. The dollar cap is adjusted every three years; the next adjustment is scheduled for April 1, 2028.
Will I get my last paycheck if my employer files for bankruptcy?
Usually yes, in a Chapter 11 case where the company keeps operating. Companies ask the court on the first day of the case, in a “wage motion,” for permission to pay employees what they earned before the filing and to keep benefits running. Courts typically approve those payments up to the priority cap, because the business cannot run without its staff.
In a Chapter 7 liquidation the business usually stops, and payroll may stop with it. Unpaid pay then becomes a claim that a trustee pays from whatever the assets bring in, in the order the Code sets.
How much of my unpaid pay is protected?
Up to $17,150 per person is a fourth-priority claim, paid after secured debts and administrative costs of the case but before general unsecured creditors. The table shows what falls under it, as of November 2026.
| What you are owed | Priority treatment |
|---|---|
| Wages, salary, commissions earned within 180 days before the filing | Priority up to $17,150 per person (507(a)(4)) |
| Vacation, severance and sick leave pay earned in the same 180 days | Counted inside the same $17,150 cap |
| Unpaid employer contributions to benefit plans for services in the 180 days | Fifth priority (507(a)(5)), with a cap that is reduced by what was paid under (a)(4) |
| Pay above the cap, or earned more than 180 days before filing | General unsecured claim, often paid at a fraction or not at all |
| Pay earned after the filing date | Administrative expense, paid ahead of the categories above |
Sales commissions earned by some independent contractors can also qualify, within the same limit. If you are owed more than the cap, file for the full amount; the claim is simply split between the priority and unsecured parts.
Is my 401(k) safe if my employer goes bankrupt?
Yes. Money already in your 401(k) account belongs to the plan, which is a separate legal entity, not to the company, so creditors cannot reach it. The Department of Labor’s fact sheet on employee benefits in bankruptcy explains that plan assets are kept separate from the employer’s business assets under federal law.
The risk is money that was withheld from your paycheck but never deposited. The Bankruptcy Code excludes withheld plan contributions from the company’s estate, but recovering them can take time. Compare your pay stubs with your 401(k) statements. If deferrals are missing, contact the plan administrator and the Department of Labor’s Employee Benefits Security Administration.
If the plan is terminated, all participants become 100% vested in their account balances. Our guide to what happens to your 401(k) when a company is acquired covers rollovers, which work the same way after a plan termination in bankruptcy.
What happens to my pension?
Traditional pensions (defined benefit plans) from private employers are insured by the Pension Benefit Guaranty Corporation. If a bankrupt employer’s pension plan ends without enough money, PBGC usually takes over as trustee and pays benefits up to a legal maximum that depends on your age and the year the plan ends. PBGC publishes the current limits on its maximum guarantee page. PBGC does not insure 401(k) plans.
What about health insurance and WARN Act pay?
Health coverage continues while the company keeps its plan. If the employer ends all of its group health plans, COBRA is no longer available, because there is no plan to continue; see COBRA after a layoff for Marketplace options.
If a large employer closed a site or cut jobs without the 60 days’ notice the WARN Act requires, workers may have a claim for back pay and benefits for the missing days. In bankruptcy that claim is filed like other claims, and courts have treated it differently depending on when the layoffs happened relative to the filing. Our guide to WARN Act notice rules explains who is covered.
How do employees file a claim?
- Check the claims agent’s case website, named in the company’s press release, for the schedules. In Chapter 11, if your wage claim is listed and not marked disputed, contingent or unliquidated, you may not need to file.
- If you are not listed, or the amount is wrong, file Official Form 410 before the bar date and mark the priority amount.
- Attach pay stubs, an offer letter or the severance agreement.
Our step-by-step guide on how to file a proof of claim covers deadlines and the claims agent.
Bottom line
Read the first-day wage order on the case website: it states which pre-filing obligations the court let the company pay, including whether unused vacation will be honored. Former employees laid off just before the filing are often not covered by those orders and need to file a claim themselves.
FAQ
Is severance protected in bankruptcy?
Severance earned within 180 days before the filing counts toward the $17,150 priority cap. Severance promised but not yet earned, or above the cap, is generally an unsecured claim.
Can a bankrupt employer stop paying me for work I do after the filing?
Work performed after the filing is a cost of running the case and is paid as an administrative expense, ahead of pre-filing claims. If payroll stops, those wages become an administrative claim.
Do I have to pay back wages the company already paid me before it filed?
Ordinary wages paid on schedule are generally not clawed back. Unusual payments to insiders shortly before a filing get more scrutiny; an attorney can advise if you receive a demand letter.
