Chapter 11 Bankruptcy: Will I Get Paid?

When a company files for Chapter 11 bankruptcy, creditors and employees often wonder if they will be paid. Unlike Chapter 7, which involves liquidation, Chapter 11 allows a business to restructure its debts while continuing operations. However, payments are not guaranteed, and the process can take years to resolve.

Payment Priority

In Chapter 11, creditors are paid in a specific order under the U.S. Bankruptcy Code. This hierarchy determines who gets paid first, significantly affecting lower-priority creditors.

At the top of the list are administrative expenses—costs related to managing the bankruptcy case. Attorneys, accountants, and financial advisors must be paid before most other creditors, and their fees can consume a large portion of available funds.

Debtor-in-possession (DIP) financing, which keeps the business running during bankruptcy, also receives high priority. Lenders offering this financing are given preferential treatment to encourage continued investment.

Taxes owed to federal, state, and local governments are another priority. Certain unpaid taxes, such as payroll and recent income taxes, must be paid in full before general unsecured creditors receive anything. In cases of unpaid trust fund taxes, company executives may be held personally liable.

Employee Wage Claims

Workers owed wages when a company enters Chapter 11 have priority over many other creditors. Wages, salaries, and commissions earned within 180 days before the bankruptcy filing are considered priority claims, but only up to $15,150 per employee as of 2024. Any amount exceeding this cap is treated as a general unsecured claim, making full repayment unlikely.

Employee benefits, including pension contributions and health insurance premiums, also receive priority. However, the combined total of wages and benefits cannot exceed the $15,150 cap.

Severance and vacation pay may or may not qualify for priority status, depending on how they were earned. If accrued as part of regular employment, they may be included under the wage cap. If promised as a lump sum upon termination, they are typically treated as unsecured claims, making repayment far less certain.

Secured Claims

Lenders with secured claims have a significant advantage in Chapter 11 because their debts are backed by specific assets, such as real estate, equipment, or inventory. If the company defaults, secured creditors can seize and sell the collateral.

The value of the collateral determines how much a secured creditor can recover. If the asset is worth more than the debt, the creditor is “oversecured” and may be entitled to interest and legal fees. If worth less, the creditor is “undersecured,” and the unpaid portion of the loan is treated as an unsecured claim.

Secured creditors can also request relief from the automatic stay, which temporarily halts collection efforts. If granted, they can repossess or foreclose on their collateral even while the bankruptcy case is ongoing. To prevent this, companies in Chapter 11 may offer “adequate protection” payments, which can include cash, replacement liens, or periodic interest payments.

Unsecured Claims

Creditors without collateral face the greatest uncertainty in Chapter 11. These claims include unpaid invoices, credit card balances, legal judgments, and certain bonds. Unlike secured creditors, they must rely on whatever funds remain after higher-priority claims are settled.

Unsecured creditors may receive partial repayment through a court-approved reorganization plan, but the amount is often significantly reduced. Courts require that similar creditors be treated equally, meaning unsecured claims are usually grouped together and paid on a pro-rata basis.

If the company is expected to survive long-term, creditors may be offered stock or convertible debt instead of cash. Bondholders, for example, sometimes receive equity in the reorganized company, though this often results in diluted shareholder value.

Potential Payment Delays or Reductions

Even when creditors and employees have valid claims, payments are rarely immediate. The restructuring process can take months or years, depending on the complexity of the case. Courts must approve a reorganization plan, and creditors often need to vote on its terms, adding further delays.

The amount received can also be much lower than expected. If the company’s assets and future earnings are insufficient to cover all obligations, unsecured creditors and even some priority claimants may receive only a fraction of what they are owed. Courts may approve repayment plans that offer pennies on the dollar, particularly for lower-priority claims.

If the restructuring fails and the company converts to Chapter 7 liquidation, creditors may recover even less, as assets are sold off and distributed according to strict legal hierarchies.