Business Filing Bankruptcy? Consequences for Employees and Shareholders

Filing for bankruptcy is a major financial step no matter who you are, and it’s particularly affecting if a business is doing the filing. When a business goes bankrupt, it’s not just the business owner that’s directly affected. The impact on employees and shareholders of a business filing bankruptcy is often overlooked by the general public, but is nonetheless important.

Effects on Shareholders

Shareholders each “own” a part of the business when they own shares of stock. If the business goes bankrupt, it doesn’t necessarily mean they lose everything, but it does mean they get put on a list of people whom the business needs to pay back for their investment in it. Unfortunately for the shareholders, they’re not the first ones on that list. They’re not second, either.

• The first and second spots, those who are paid back first out of a bankruptcy, are the business’ creditors and bondholders.
• Whether or not anything is left for them is a gamble.

To make things more complicated, this is only the situation when the business files a Chapter 7 bankruptcy, which is a total liquidation of all assets. If the filing is a chapter 11, the business’ version of a chapter 13 involving some debts erased but not all, the shareholders may see their money again, but chances are extremely high that the shares will simply be canceled on them. In other words: no matter what the specifics of the bankruptcy, shareholders have a pretty poor chance of getting their money back. Depending on how large of an investment they had and their personal financial situations, the effect this has upon them could be pretty severe.

Effects on Employees

This one is more obvious: employees of a company that files for bankruptcy are often out of a job. Often, but not always. The good news, if it can be called that, is that if the filing is for a chapter 11, the business still exists in every sense of the word. It hasn’t been liquidated. Thus, it still needs employees, and job loss is not an automatic consequence. Of course, many jobs can, and likely will, be sacrificed in order to cut costs and expenses down to the bare minimum at a time like this. But it’s not a sure thing, as it tends to be with a chapter 7 liquidation bankruptcy. In a chapter 7, the company for all intents and purposes is wiped out of being, at least eventually, as their assets are sold off to pay up debts and they have none left to continue supporting operation. It may be a temporary condition, so all hope is not lost if employees care to wait around for the business to get back on its feet.

Getting Help

If you are a business filing bankruptcy, you need to consult with an experienced lawyer as soon as possible. Your attorney can explain the different types of business bankruptcy and can assist you in making the right choice for your business that will best protect your shareholders and employees.