Small Business Bankruptcy: How to Take Care of Your Employees


Bankruptcy is a word no employee wants to hear. This is especially true for employees at smaller businesses. Many small businesses don’t have the HR resources to help transition the team and prepare them for upcoming changes. As is often the case for small businesses, upper management usually fulfills the HR department’s role.

So how do you deliver the knowledge, experience, and attention to detail often found in well-oiled HR departments without the resources? The best way to ensure your employees are given the best deal during your bankruptcy is to arm yourself with knowledge. This article will provide a brief overview of your options when making challenging decisions regarding the future of your small business’s team.

Transparency First

One of the biggest mistakes a small business owner can make is not being upfront and honest with his or her employees about the state of the business. If your business is struggling, your employees will probably be aware that something isn’t right. You should attempt to quell any rumors or misconceptions before they form by being completely upfront about the state of your business.

Give your employees the dignity and respect they deserve by keeping them well-informed regarding the prospects of the business. It’s ok not to know what the future holds and express your uncertainty to your employees with compassion and concern.

Bankruptcy Will Mean Changes, Not Necessarily the End of Your Business, Or the Termination of Your Employees.

Consulting with a bankruptcy attorney is essential for deciding which bankruptcy chapter you should file under. One chapter is designed to allow businesses to remain operational while they pay back their debts. Chapter 11 Is usually more expensive than other chapters of bankruptcy. However, your small business may be eligible to file under chapter 11, subchapter 5, as a small business debtor.

As a response to the coronavirus pandemic, congress raised the debt ceiling to qualify for subchapter five from $2.75 million in debts up to $7.5 million. This measure was extended through March of 2022 when it will either expire or be renewed.

This measure makes bankruptcy affordable for more small businesses that wish to remain in operation, meaning that at least some of your employees can remain employed.

You Will Still (Probably) Have to Make Cuts

It is essential to be transparent about the fact that cuts to employment or employee hours will need to be made. So how do you decide where to make the cuts? And, once determined, how do you go about breaking the news?

What to do Before You File For Bankruptcy

So, you have decided that bankruptcy is the best path forward for your business. By now, you have informed your employees about the matter — so what next? To ensure the best possible deal, you need to consult with third-party professionals experienced in small business bankruptcy matters.

This will cost money, as you will need to consult with lawyers,  financial advisors, and accountants. If you have the resources to spend, your employees would also benefit if you met with an HR consultant. Consulting with professionals will save you time and — in the long run — money.

  • They will help you set up a timetable to communicate directly to your employees to keep them in the know.
  • You will also receive crucial advice on where to make cuts and by how much.
  • Attorneys specializing in small business bankruptcy can get you the best deal.

You need to act expeditiously to make sure the following items are considered before you file:

  • How will you manage workforce reduction?
  • How do you determine employee retention?
  • Will there be changes to compensation, benefits, and incentive programs?
  • How will you revise your company/employee policy?

What to do After You File For Bankruptcy

You need to set up an effective communication strategy to accurately and adequately update employees on your bankruptcy proceedings and the potential consequences. The prospect of being laid off is difficult enough for employees to swallow without adding uncertainty and a lack of definiteness in the mix.

Depending upon your industry and where you sit in a supply chain, you should also inform partners and associated businesses situated along your supply chain.

What to Do When Layoffs Are Necessary

There are federal requirements for proceeding with layoffs. The WARN act is meant to protect employees from having the rug pulled out from beneath them. In the event of a mass layoff, employers must give 60 days’ notice or payout 60 days’ worth of wages and full benefits.

Be prepared to support laid-off employees after the layoff.

You should offer help for finding new employment and for applying for unemployment. Additionally, you must offer to be a professional reference for your laid-off employees. You must demonstrate to them that this is a tough business decision being made in the financial interests of the whole organization. Helping them get back on their feet and recover should be a priority.

Employee Retention is Equally As Important As Layoffs

When restructuring your business, you must decide who to keep. As competitors might try to sweep up your best-performing employees, you’ll need to provide strong incentives to keep your best talent. Because your business will be operating at reduced capacity, it’s vital to keep the workers necessary for the success and survival of your business.

Your Business Can Make It Through a Bankruptcy

Though the bankruptcy process is arduous and takes a toll on every participant’s well-being, it is designed to help alleviate insurmountable debts. There is light at the end of the tunnel for your business and your employees, so long as you act professionally, appropriately, and with compassion.

About the Author

Veronica Baxter is a writer, blogger, and clerk for a successful bankruptcy lawyer in Philadelphia. The daughter of military parents, Veronica lived all over the world as a child growing up and collected experiences and friends throughout her travels.

Small Business Bankruptcy: How to Take Care of Your Employees

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