How To File For Bankruptcy: 7 Things An HR Leader Can Do

While bankruptcy might seem like uncharted territory for human resources professionals, understanding your role in this challenging time can make the difference between chaos and a structured transition.  

The reality is that HR directors carry significant responsibilities during bankruptcy proceedings. As an HR professional, you’re managing a process and stewarding people through one of the most uncertain periods they may ever face professionally. 

So, when filing for bankruptcy, here are the things you can do. 

1. Understand Your Legal Obligations and Seek Expert Guidance 

You first need to grasp the legal framework surrounding your responsibilities. That’s because the bankruptcy process involves federal laws, and HR leaders must consider employee rights, benefits continuation, and notification requirements with precision. 

Consider consulting with a bankruptcy lawyer Arizona (or in your jurisdiction) who specialises in employment law intersections. These professionals understand how the Bankruptcy Code affects workforce decisions and can guide you through the maze of legal requirements. Remember, different chapters of bankruptcy each carry distinct implications for how you’ll handle employee-related matters. 

The automatic stay provision, which halts most collection activities once a bankruptcy petition is filed, doesn’t necessarily protect against employment-related claims. This complexity underscores why legal advice becomes crucial early in the process. You’ll want clarity on which employee obligations continue, which can be modified, and which might be discharged through the bankruptcy proceedings. 

2. Develop a Comprehensive Communication Strategy 

Nothing breeds panic like information vacuums, and during bankruptcy proceedings, rumours can spread faster than facts. As an HR leader, you become the primary communication hub for employee concerns, questions, and fears. Your communication strategy needs to balance transparency with legal constraints. 

Start by identifying what information you can legally share and when. Bankruptcy courts require specific notifications to various stakeholders, including employees, but timing matters significantly. Work closely with legal counsel to understand disclosure requirements and craft messages that provide necessary information without compromising the legal process. 

Consider multiple communication channels: all-hands meetings for immediate concerns, written updates for documentation purposes, and one-on-one sessions for employees with specific questions. The goal is to maintain trust during a period when employees naturally question everything about their workplace stability.

3. Navigate Employee Benefits and Compensation Changes 

Perhaps no area presents more immediate challenges than managing the intersection of bankruptcy proceedings with existing employee benefits and compensation structures. The Bankruptcy Code provides specific guidance on how employee claims rank in the creditor hierarchy, but translating this into practical benefit administration requires careful planning. 

Priority claims for wages typically receive favourable treatment in bankruptcy proceedings, but there are caps and timeframes that affect how much employees can recover. Understanding these limitations helps you communicate realistic expectations to your workforce. Additionally, you’ll need to evaluate which benefits can continue uninterrupted, which require modification, and which might need suspension. 

Health insurance continuation becomes particularly complex, as COBRA obligations may conflict with the company’s ability to pay premiums. Some companies find temporary solutions through state programs or alternative coverage arrangements. The key is proactive planning rather than reactive crisis management when benefit providers start demanding payment or threatening coverage termination. 

4. Manage Workforce Transitions and Potential Layoffs 

Bankruptcy often necessitates workforce reductions, but these decisions carry additional complexity beyond typical layoff procedures. The bankruptcy court may need to approve certain employment decisions, particularly if they involve key personnel or significant severance obligations. As an HR leader, you’ll need to balance operational necessities with legal requirements and human compassion. 

Chapter 11 proceedings, in particular, often involve workforce restructuring as part of the reorganisation plan. This means your layoff decisions create a sustainable workforce structure for the company’s future. Document your decision-making process carefully, as bankruptcy courts scrutinise employment-related expenses and decisions. 

Don’t overlook the survivors. The employees who remain during and after bankruptcy proceedings. These individuals often carry increased workloads, heightened stress, and uncertainty about their own job security. Developing retention strategies for key talent becomes critical, even when resources are constrained. 

5. Coordinate with Bankruptcy Professionals and Stakeholders 

Bankruptcy proceedings involve numerous professionals beyond your internal legal team. You’ll likely interact with trustees, creditors’ committees, and various court-appointed professionals. Understanding these relationships and your role within them helps ensure smooth information flow and decision-making processes. 

The U.S. Bankruptcy Courts operate with specific procedures and timelines that don’t always align with typical business operations. Filing deadlines, court appearances, and stakeholder meetings may require your participation or input, particularly regarding employee-related matters. Staying organised and responsive to these requirements prevents delays that could complicate the overall proceedings. 

Additionally, if your company is pursuing Chapter 11 reorganisation, creditors and potential investors will scrutinise your workforce costs and HR policies. Being prepared to explain and justify employee-related expenses, benefit structures, and retention strategies becomes part of your role in supporting the company’s reorganisation efforts. 

6. Maintain Compliance with Employment Laws During Proceedings 

Bankruptcy doesn’t provide blanket protection from employment law compliance. In fact, the scrutiny of court proceedings often means you need to be even more meticulous about following proper procedures for workforce decisions, benefit administration, and employee communications. 

The Worker Adjustment and Retraining Notification (WARN) Act still applies during bankruptcy, requiring advance notice for plant closures or mass layoffs. However, bankruptcy proceedings may affect timing requirements and notification procedures. Understanding these nuances prevents additional legal complications during an already complex process. 

Discrimination laws remain in full effect, meaning layoff decisions must still follow legitimate business criteria rather than protected class considerations. Document your decision-making processes thoroughly, as disgruntled employees may challenge employment decisions through various legal channels, even during bankruptcy proceedings. 

7. Plan for Post-Bankruptcy Human Resources Operations 

Whether your company emerges from Chapter 11 reorganisation or assets are sold through Chapter 7 liquidation, your role as an HR leader includes planning for what comes next. This forward-thinking approach helps preserve institutional knowledge and supports business continuity efforts. 

For companies pursuing reorganisation, rebuilding employee confidence while operating under potentially different ownership structures or business models is crucial. This might involve renegotiating union contracts, restructuring benefit packages, or implementing new performance management systems that align with the reorganised company’s goals. 

If assets are being sold, you might find yourself facilitating employee transitions to acquiring companies or managing final employment obligations. Understanding how employee liabilities transfer (or don’t transfer) in asset sales helps both your company and employees navigate these transitions more effectively. 

Moving Forward 

While difficult, the bankruptcy process can also provide opportunities for organisational renewal and improved HR practices. As an HR leader, your role in shaping these improvements can contribute significantly to long-term organisational success and employee satisfaction. 

Remember that your actions during this challenging time will be remembered long after the bankruptcy proceedings conclude. Handling these responsibilities with professionalism, empathy, and strategic thinking not only serves your immediate legal and operational needs but also positions you and your organisation for stronger relationships and better outcomes in the future.

Sarah Martinez-Chen is a seasoned HR executive and business consultant based in Denver, Colorado, with over 6 years of experience guiding organisations through complex crisis management. She has helped dozens of companies navigate bankruptcy proceedings while preserving employee relationships and organisational culture.