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Consequences of not paying employees before bankruptcy

If business is bad and you are considering Chapter 7 bankruptcy, experts advise you to keep your employees at the top of your payment schedule.

In a Chapter 7 bankruptcy, the trustee places those owed salaries, wages or commissions below only secured creditors to receive your liquidated assets. If there isn’t enough to cover the debt, employees will see only a portion of what they are owed.

Tips on how to handle wage shortfall

Before declaring bankruptcy, the first thing to remember when your company comes up short on wages is to continue to pay payroll and sales taxes. The IRS will hold you responsible for at least 50 percent or more of those taxes until the day you pay them.

The next step is to decide whether you should close your business, lay off your staff or find some way to generate money. Assuming you don’t want to close or operate a one-person shop, that means looking to secure funding through family and friends, hard money loans, credit or discounts on receivables.

If you are operating in a down economy, family and friends are not a likely source of income. Banks in down economies typically require securities you might not own in order to secure a loan or line of credit.

Money from lenders, receivables

Hard money lenders are an unattractive yet viable option. They require loans to be secured by real estate and assess high interest charges, but they do have money available.

Lastly, you could liquidate your inventory or, if you are owed money, negotiate a discount on receivables in return for immediate payment. That $25,000 you are owed may drop down to $10,000, but it will give you $10,000 to pay your employees and bills for another week.

Experts suggest you be honest with your employees about your income shortfall as early as possible so they have time to plan for a diminished income. Experts also suggest you avoid the temptation of paying employees a fraction of what they are owed. It is better if you and other top executives take a pay cut or forgo income altogether if it means keeping engaged workers on board.

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