Collect Severance From Bankrupt Employer?

Dear Bankruptcy Adviser,I was laid off by my employer and agreed to a signed severance agreement of $77,000. A week later, they filed bankruptcy and I'm now an unsecured creditor. I filed my Proof of Claim, and the company noted on the claim that I am unsecured for that amount. The company is now nearly liquidated and will have nearly $4 billion to $5 billion in cash. But there are creditor claims for an estimated $7 billion to $10 billion. Do you believe my severance agreement will be an allowable claim in the bankruptcy court?-- Tom

Dear Tom,I am sorry to hear that you were laid off and that you may not be paid your severance package. However, you were right to file the Proof of Claim within the employer's bankruptcy. That is the only way you will get paid, if you get paid at all. Yes, your claim should be allowed. I just don't know what you ultimately will collect.

There are a few issues to consider before I could be certain your claim would be allowed, but in general, this type of claim is permissible in a bankruptcy context. Please note: This column answer is based on a very general issue within bankruptcy. You may have other issues that may require legal representation regarding your claim against your former employer. I say that because this answer is more a generic explanation of the process and not explicitly for your case.

A Proof of Claim is the official form used by a creditor -- in this case, you -- in a bankruptcy case to show the court you are entitled to be paid. The amount of a bankrupt company's assets determines whether you get paid all, some or none of your claim. Failing to file a claim will guarantee that you get nothing.

Obviously, you worked at a very large company. And like many large and small companies, this one filed bankruptcy because it could not continue to service its debt load with current revenue or assets. Unfortunately, you are a very small piece of a very large amount of debt. As you state, you are being treated as an unsecured creditor. That means you are lower down in the creditor food chain.

In general, the creditor chain has four types of claims, and there are two types of claims that would typically be paid before yours. Let's go over the four categories.

The first group is secured creditors. These are lenders that have an interest in specific property of the company like real estate, business equipment or vehicles. The means that the lender has a security interest in an asset of the company. If the debtor -- in this case, the company -- doesn't make payments, the property may have to be surrendered to the secured creditor.

The second group is known as unsecured but priority administrative, tax and domestic support claims. This class of claims includes things like attorney fees, back taxes and expenses to keep the business operating while inside bankruptcy. I am certain there will be millions in administrative claims.

The next group is known as unsecured but priority creditors. A percentage of your severance package may be in this position. Up to $11,725 of your severance could have a higher priority than some unsecured creditors to the extent that you signed the severance agreement within 180 days before your former employer filed bankruptcy. This means you could receive about 15% of your severance as this type of creditor.

You may get additional money by being a member of the fourth group: general unsecured creditors. These creditors gave unsecured credit or provided services without having a security interest. Unlike a secured creditor, an unsecured creditor has no collateral to take back. When the company files bankruptcy, these claims are pooled together and will receive a pro rata share of the money paid to general unsecured creditors. This means you will be paid in proportion to the other general unsecured creditors. Each of these creditors will get paid a certain number of cents on the dollar.

It is hoped that you receive your full severance, but realistically, that probably will not happen. At least you filed the Proof of Claim to protect your interest.