What Employers Need to Know When an Employee Files Bankruptcy

With the declining economy, bankruptcy filings are on the rise. You need to be prepared in case one of your employees files a bankruptcy. There are two types of bankruptcy cases that are commonly filed by individuals. An employee may file a Chapter 7 bankruptcy and attempt to discharge (wipe out) his or her debts. If an employee’s income is too high or an employee has assets that need protection (or for a variety of other reasons), an employee may file a Chapter 13 bankruptcy and establish a repayment plan for his or her debts over 5 years. When an employee files bankruptcy (either Chapter 7 or Chapter 13), an automatic stay is created which prohibits creditors from pursing any actions against the employee to collect a debt or pursue a claim. Typically, unless your employee owes you money for some reason (possibly an advance on income), you will not receive notice of the bankruptcy from the bankruptcy court. However, your employee may choose to tell you that he or she has filed bankruptcy. You will likely be notified if there is an ongoing wage garnishment, because a wage garnishment or levy must stop as a result of the protection of the automatic stay. Once you receive notice of an employee’s bankruptcy, you should immediately stop withholding wages pursuant to a garnishment order until further notice.

Your employee may need to take some time off of work in order to meet with his or her bankruptcy attorney. In addition, after the filing of a bankruptcy, your employee will need to attend a hearing known as a 341 meeting of creditors. The employee will be examined by a bankruptcy trustee concerning his or her assets, liabilities, income and expenses. These hearings can be continued multiple times by the bankruptcy trustee. Your employee has no control over the date and time that these hearings are set. In addition, your employee has little ability to reschedule these hearings. When your employee needs to take time off work to attend these hearings, you should consult your policies concerning employee absences. For example, if you offer PTO (“paid time off”) or time off for personal days, your employee may use this time to attend the bankruptcy hearings. You cannot discriminate against or terminate an employee because he or she filed for bankruptcy. (You also are prohibited from discriminating against job applicants simply because they have filed for bankruptcy protection in the past.) If you have an employment contract with an employee who has filed for bankruptcy and you want to terminate the contract while the bankruptcy case is open, you should consult a bankruptcy attorney because you would need to obtain the court’s permission to get relief from the automatic stay before you terminate the contract.

Be mindful of your employee’s right to privacy. Although bankruptcy petitions are public documents, financial information concerning your employee (such as garnishments) should be kept private between you and the employee. Also, financial records, such as garnishment information, should be maintained separately from personnel records and only accessed on a need to know basis.

If you have a claim against an employee or former employee who files bankruptcy, you may be able to file a complaint to ensure that the debt isn’t discharged through the bankruptcy depending on the type of claim. For example, if you have a claim against an employee for misappropriation of trade secrets or embezzlement, those debts may be nondischargeable. However, you have to file a complaint within 60 days after the meeting of creditors. If you have this situation arise, consult a bankruptcy attorney immediately.