In a weakening economy, thousands of businesses are shutting down shop and laying off employees.
A company’s impending bankruptcy can have devastating consequences for fearful employees, says Lisa Lane Brown, author of “The Courage to Win: A Revolutionary Mental Toughness Formula.”
“If you let fear turn into panic, you are vulnerable to making poor decisions about your career and money,” says Brown, a career coach who has counseled employees battling bad times due to an employer’s failure.
By contrast, workers who take charge of the fear and use it to motivate positive change “will thrive, even in stressful financial times,” Brown says.
Following are some steps you can take to protect yourself financially when your company might be headed for bankruptcy.
Business bankruptcy filings totaled 33,822 for the 12 months ending in June 2008. That was a 41.6 percent increase from the 23,889 bankruptcies for the 12 months ending in June 2007, according to the Administrative Office of the U.S. Courts.
A short list of failed companies includes Mervyn’s, Circuit City, Linens ‘n Things, Sharper Image, Bennigan’s and Aloha Airlines. Even automaker giant General Motors is teetering.
If your company appears headed for trouble, it’s time to get your finances in order before the company declares bankruptcy.
This means crafting an investment mix appropriate for challenging economic circumstances. Brown suggests creating and reviewing a personal financial statement with an accountant or investment adviser.
“Your decisions in this area are completely unique to you and should reflect your risk level,” she says.
However, Brown suggests some general rules of thumb, such as having 10 percent to 20 percent of your money available in cash; 30 percent to 40 percent in longer-term, secure investments such as Treasury bills and bonds; and 40 percent to 50 percent in real estate or equity mutual funds.
John Baker, author of “READY Thinking — Primed for Change,” says it may also be prudent to cut back on expenses.
“Defer major purchases and delay expensive outlays,” says Baker, who has worked as a former chief operating officer for Ameriprise Financial and a vice president at American Express.
At a minimum, it’s wise to avoid using credit, he says. Instead, set up a six-month reserve of emergency cash. If your budget has become bloated, find ways to trim it.
“Belt-tightening is never a sexy prospect, but going on a budget can give you a sense of personal control during chaotic times,” he says.
If your company decides to declare bankruptcy, you could be among the last to know.
If your workplace has 100 or more employees, the Worker Adjustment and Retraining Notification Act requires employer notification of a mass layoff 60 calendar days in advance.
However, if you work at a small business, you might not discover your employer’s fate until the last minute — by e-mail, a phone call or padlocked front doors.
Once the bankruptcy is announced, you’re likely to have more questions than answers. For starters, will you receive a final paycheck?
Employees have a priority claim for up to $10,000 in wages, according to bankruptcy law. This means that employees’ claims are among the first to be addressed in court, and, it is hoped, among the first to be paid.
But there’s a catch or two.
“Only wage claims earned within 180 days before the bankruptcy filing are entitled to priority,” says Fred Corbit, a consumer lawyer working for the Northwest Justice Project, a public interest law firm.
Prior to joining NJP in 2007, Corbit was a partner in a private law firm and represented trustees, debtors and creditors in bankruptcy proceedings nationwide.
Corbit says you’ll only get your wages if the company still has cash — or credit — to pay you.
Although “an employee is entitled to be paid if there is money in the estate,” a failed business doesn’t always have money left over after starting legal proceedings, Corbit says. The last of a company’s savings can be consumed by administrative expenses, which come before wage claims in priority.
Amounts over $10,000 are harder to recover, because they exceed the $10,000 priority claim established by bankruptcy code.
A Chapter 7 bankruptcy is especially likely to create havoc with your pay. Unlike a Chapter 11 bankruptcy — in which the company reorganizes with the intent of staying in business — a Chapter 7 bankruptcy involves the liquidation of the company.
If a company’s sole remaining assets are claims against other companies, the trustee (the individual responsible for dividing a business’ assets and repaying creditors) might not be able to distribute funds to employees until all litigation is complete.
So don’t count on that last paycheck in your mailbox for weeks, or perhaps even years. If you’re confused or concerned, consult with your state department of labor office or hire a private attorney.
The Fair Labor Standards Act, or FLSA, which ensures that nonexempt employees (hourly employees not exempt from overtime pay) are entitled to wages earned, does not address accrued sick and vacation time and bonuses proffered, according to the Department of Labor.
However, bankruptcy code does say that employees are entitled to sick, vacation, bonuses and commissions — as long as the above were earned within 180 days before bankruptcy.
Future medical benefits also may be in jeopardy after a bankruptcy. If your company continues to exist under Chapter 11 bankruptcy, you may qualify for an extension of medical benefits under COBRA for a limited amount of time.
However, if the company disappears, so does the COBRA.
Other options are to purchase private health insurance and to check your eligibility for being added to your spouse’s health insurance — a layoff and subsequent medical benefit termination typically counts as a “qualifying event.”
Finally, a company bankruptcy is likely to take a devastating toll on any stock options you’ve accrued or exercised.
Newcomb suggests speaking with a tax adviser if you’ve paid income tax on exercised incentive stock options and now hold shares that have become worth much less — there may be tax credits available to soften the blow.
Retirement plans are better protected, thanks in part to the Employee Retirement Income Security Act of 1974, or ERISA, which sets minimum standards and responsibilities for pensions and other retirement plans.
Your 401(k) or pension funds should be secure, if they’re held by an IRS-approved custodian such as a trust company, says Keith Newcomb, a financial planner at Full Life Financial LLC in Nashville, Tenn. Newcomb helps individuals navigate workplace-related benefits and investments.
But ERISA’s regulations don’t protect your 401(k) earnings from the ravages of a stock market downturn. It simply means that a company bankruptcy will not result in the liquidation of your 401(k) account.
“In a nutshell, the money in a 401(k) belongs to the employee” rather than the employer, Newcomb says.
If you have a pension plan, you will still received at least some of your monthly pension payment when you retire. The Pension Benefit Guaranty Corporation, a federal entity, ensures payment of some pension benefits even if an employer goes bankrupt and can no longer fund the pension. Read about your rights to funds in the event of employer bankruptcy at the U.S. Department of Labor Web site.
While federal law protects most of your retirement assets, it is possible for some money to stay in your bankrupt employer’s pocket rather than your retirement plan.
For example, deposits to a 401(k) account could be in jeopardy if the business took contributions out of your paycheck but failed to deposit them in your 401(k) account with the retirement plan custodian.
Missing contributions will be another “priority claim” in bankruptcy court, but you’ll have to wait — and possibly fight — for your money.
With this in mind, check your retirement accounts before the ship sinks. Deposits shown on statements from your 401(k) custodian should match your 401(k) contributions withheld from your paycheck by your employer, Newcomb says.
If you’re laid off, roll over retirement funds to an individual retirement account, a new employer’s plan or some other option as soon as possible.
“Cashing out your 401(k) plan to ensure you have cash on hand is imprudent and irresponsible,” Baker says. “Despite any setback you’re facing today, you’ll still want to retire sometime.”
If your retirement account was based heavily in company stock, and your account is worth less than the amount you and your employer contributed, you may be able to deduct the loss from your taxes under some circumstances.
In some cases, your job may not disappear just because the company declares bankruptcy. Chapter 11 bankruptcy allows businesses to continue operations while they reorganize.
For example, Delta Air Lines filed for Chapter 11 bankruptcy Sept. 14, 2005. However, the company emerged from bankruptcy April 30, 2007, and relisted on New York Stock Exchange by May 3 of that year.
If your company is restructuring and intends to stay afloat, you may decide to take a chance and stay on. If so, remember that you’ll need to be flexible.
“Re-package and re-invent your services to be in sync with what your employer needs,” Brown says.
Beth Johnson, senior vice president for human resources at Delta, urges employees to think about the changes a company intends to make to stay competitive, and to decide whether or not they fit into this vision of the future.
Also try to understand where you stand in the company — a top performer in a critical function is less likely to receive an immediate pink slip.
“Increasing your value to the company is even more important at this time,” Johnson says.
“There will be opportunities to make a positive impact by staying focused on making the company successful.”
If you choose to stay with a company that declares Chapter 11 bankruptcy, remember that the company may not be stable for some time. While the law states that companies in Chapter 11 are supposed to file a plan of reorganization as soon as practicable, “a complicated reorganization could take several years,” Corbit says.
If your company decides to file Chapter 7 bankruptcy, it is unlikely that you will keep your job for long. A Chapter 7 filing means the company is not planning on staying open for business or restructuring. Instead, it will liquidate all assets.
An employer’s bankruptcy can be a wild ride — you’re not sure where you’re going, or if there’s even a sober driver manning the wheel.
Such feelings are normal.
Employees need to grieve when hearing the bad news, says John duHadway, former chief financial officer at Ownit Mortgage Solutions, which declared bankruptcy in 2006 and laid off 800 employees.
For duHadway, bankruptcy was like mourning the death of a loved one.
“Before you could move on you had to go through, in essence, a grieving cycle,” he says. “You loved your company and your employees and you devoted a substantial portion of your life to it and them.”
He says he struggled with depression, overeating, seclusion, anger, helplessness and “at times, a feeling of hopelessness.”
Grieving is natural and normal. But Brown urges workers to beware of falling into a vortex of “learned helplessness” that causes you to feel like a passive victim.
“Work daily on reversing any learned helplessness you may be feeling,” Brown says.
Start with the basics, such as applying for unemployment, hitting online career boards and tapping your network of professional contacts.
Once you’ve taken care of the basics, find ways to make this unexpected and unwelcome change work for you.
“Take control of your fear by using it to motivate yourself to new levels of career performance, flexibility and financial literacy,” Brown says. “Just as periods of prosperity pass, so do recessions. But your newfound skills will be with you always.”