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Justin Harelik, the Bankrate.com Bankruptcy AdviserFiling proof of claim against bankrupt company

Dear Bankruptcy Adviser,
I worked for a union company for 14 years, and the owner's son started up another company in September 2004 and asked me to come and work for him. It was nonunion, but the shop was closer to home, so I said OK. We drew up a written contract between him and me stating that I would receive four weeks vacation and contributions made to a retirement pension (90 weeks at $87 per week).  In May I was laid off. In July 2006 the company filed Chapter 11 bankruptcy. I contacted him and was told he would make good on this, that his father was helping him start another company. Seven months later I contacted him and was told he couldn't help me because he has no money right now. Do I have a case you can help me with or am I out of luck? Can I place a lien on his house or cars? I'm out around $11,000.
-- Tim

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Dear Tim,
I believe that I understand your question. However, from a legal perspective, without knowing your exact situation, it's hard for me to give you precise advice. For example, did you receive any severance or retirement money? Are you owed wages? Are you owed pension contributions? Has the deadline for filing a proof of claim passed? These details matter a great deal.

Having said that, it appears from what you are saying that you are owed money from the company, not the individuals. That is to say, the son was acting on behalf of his company when he offered you the contract. Thus, you probably can't sue him or place a lien on his house.

As well, because the company is in bankruptcy, it will be harder for you to get your money than it would be if the company had violated your contract while still being solvent. That being said, it may be possible for you to get your money back. In effect, you are a creditor that is owed and you need to act and behave like any other creditor.

The company filed Chapter 11 because they want to try and stay in business. This is an option that will allow them to pay back their creditors over time and stave off lawsuits (like the one you were considering).

As a creditor, what you can do is file a proof of claim. This is your legal statement that the business owes you money. The administrator in charge of the Chapter 11 case (called a trustee) will determine whether it is possible for you to be paid. Do it soon as there is a deadline for filing.

If the company is paying back all its obligations through the Chapter 11, then you would get paid eventually. If they are not paying back everyone, then there's a line that forms. Secured creditors go first (those who loaned the company start-up capital for equipment or real estate), then the government (in case the company owes corporate and employment taxes), then unsecured creditors such as yourself.

If they do not have the necessary money to pay unsecured creditors, you may be out of luck and the debt owed to you would be discharged when the bankruptcy is over. That would not be a good outcome for you, I know. It seems strange that bankruptcy laws would protect the company at the expense of a worker like yourself. However, in the big picture, protecting the company through a Chapter 11 is about saving as many of the workers' jobs as possible. That's the idea, anyway.  

There are exceptions to your status as an unsecured creditor. For example, unpaid wages up to a certain amount can change your priority status. Meaning, you could be treated more favorably by the bankruptcy code and receive payment distributions sooner than unsecured creditors.

If you are comfortable navigating through the bankruptcy process, then you can file the proof of claim on your own. However, as you are a former union member, I would ask the union what to do. They may have encountered similar situations in the past. If needed, you can also hire a bankruptcy attorney to handle the situation. The attorney would charge you some money upfront, but he might also be willing to have some of the attorney fees paid through the Chapter 11 repayment plan. That way, you do not have to come up with too much money to hire an attorney that will file the proof of claim on your behalf.

Regardless, Tim, I recommend taking the chance and filing the proof of claim. You're owed a lot of money and you deserve to get it back.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the "Ask the Experts" page, and select "bankruptcy" as the topic.

Bankrate.com's corrections policy-- Posted: March 27, 2007
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