Payment of Employee Salary and Benefits as Priority Claims

In bankruptcy, generally, secured claims are paid first and in full while general unsecured creditors are paid pennies on the dollar. However, for policy reasons the bankruptcy code has determined several “priority claims” which get paid after secured creditors but before general unsecured claims.

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Section 507 lists the order of priority claims which are paid in descending order. The order only matters in a Chapter 7 bankruptcy case because in Chapter 13 bankruptcy priority claims must be paid in full. Nevertheless, the fourth and fifth priority claims involve past due employee salary and benefits. This includes wages, salaries, severance, etc. earned during the 90 days prior to filing but cannot exceed $11,725 per employee.

Any remainder will be an unsecured non-priority claim. In addition, employee’s can receive the contributions made to employee benefit plan during the 180 days before filing or end of business. Thus, the formula to determine fourth and fifth priority claims are as follows:

  • Take $11,725 and multiply it by the number of employees
  • That number is the maximum amount you can give to the 4th and 5th priority claims.
  • You take that number and subtract the amount of you gave for employee wages.
  • That remaining number is the amount that you can give for benefits

If that number does not satisfy the amount of benefits in full then take that number and divide it by the total amount of employee benefits, which gives you a percentage. Each employee is then entitled to that percentage of their claim with the remaining becoming a general unsecured claim.