Owners ask about creditors first. The questions that keep them up at night are usually about people.
What happens to the crew on Friday? What about the lease? Who gets paid first out of whatever is left?
Those answers are set by statute, not by the owner.
Final Paychecks
Wages earned before the filing become claims against the estate. They are not bills the company simply pays.
The Bankruptcy Code gives those wage claims priority. Pay earned in the 180 days before the case moves near the front of the line, up to a per employee cap that gets adjusted for inflation every few years. Anything above that cap drops back with ordinary unsecured debt.
Two things owners get wrong here:
- Priority does not mean guaranteed. It means better position. If the estate is empty, a priority claim still pays nothing.
- Paying employees out of company funds right before filing can be undone. A trustee can pull back transfers made shortly before the case.
Employee contributions to a benefit plan get similar treatment, with their own limits.
Payroll Taxes Are a Different Animal
Money withheld from a paycheck was never the company’s money. It belonged to the employee and was held for the government.
That is why trust fund taxes do not go away in a business filing. The IRS can assess them personally against anyone who had control over payroll decisions. That includes officers, and sometimes a bookkeeper with signing authority.
A Chapter 7 that closes the company does not close that exposure. Anyone weighing corporate bankruptcy options for a small business should have this priced out before filing, not after.
The Commercial Lease
A lease is a contract, and the Code gives the debtor a choice on contracts. Keep it or walk away.
For commercial space, the deadline to decide is 120 days from filing. A court can extend that once, to 210 days total. After that the lease is treated as rejected and the space goes back.
Rejecting a lease does not erase the landlord’s claim. It converts it. The landlord gets an unsecured claim for damages, and the Code caps how large that claim can be.
Rent that comes due after the filing, while you are still using the space, is different again. That gets paid as a cost of running the case.
Who Gets Paid, and In What Order
The order is fixed, and it is not negotiable:
- Secured creditors, out of their own collateral
- Costs of running the bankruptcy case
- Priority claims, including recent wages and certain taxes
- General unsecured creditors
- Owners, last
Most small business estates run dry somewhere in the middle. That is normal, and it is why the order matters more than the totals.
The same structure applies at every size. The SEC’s overview of what happens to a company’s securities in bankruptcy walks through the same ranking, and explains why the people at the bottom of the list usually recover nothing.
Steps Worth Taking Before You File
A few things are worth doing before the petition goes in.
Run final payroll properly if there is money to run it with, and account for the withholding. Tell employees before they find out from a locked door. Gather the lease, any personal promise attached to it, and the last twelve months of rent records.
Pull a list of every payment made to insiders or family in the past year. A trustee will pull that list anyway. Better that you see it first.
The Part Owners Skip
Employees will ask about their last check, their benefits, and their unemployment claim on the same day.
Have an answer ready for each one. A filing that blindsides the people who worked for you generates the most complaints, and complaints draw attention from the trustee.