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Bankruptcy – what happens when your company has to declare bankruptcy?

by Catherine Muriel on 06/4/09

In this economic downturn unfortunately this is happening more and more. There are two types of bankruptcy that a company may file – Chapter 11 or Chapter 7. Depending upon which they file, it affects the safety of your job and therefore your benefits.

Chapter 11 allows the company to restructure. Many large corporations have done this such as the Tribune Company (the publisher of the Chicago Tribune and the Los Angeles Times), United Airlines and of course, GM.

Chapter 7 is the complete shut down of a company. As a result of this all future benefits to the employee are terminated. If you have a 401(k) with this company the 401(k) will be liquidated and the assets will be distributed. You can then roll these funds over into an IRA to avoid tax penalties.

Chapter 11 more than likely means that your position may be retained; however you could be facing financial cutbacks such as reduction in salary and even benefits.

With regard to a Chapter 11 filing, it is important to know your legal rights as there are laws that protect you:

- Your pension plan can be dissolved – a court decides whether the company can continue to cover the plan.  Unfortunately the pension plan can be dissolved, however The Pension Benefit Guaranty Corporation guarantees up to $51,000 per person per year in 2008 for people retiring at age 65. You can visit their website to learn more. 

- Your 401(k) assets – these have to be held in a trust account and cannot to accessed by your employer or creditors.  However, as mentioned earlier, one of the cut backs you may experience is the ceasing of matched contributions.

- Your health benefits may be reduced – if you are let go you can use the coverage from your employer for 18 months through COBRA. However, look around for alternates as there are less expensive options out there – some people have said that Costco has a good option. There are websites you can visit to do some comparison shopping.


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