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.
3. Protect your retirement 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.