The fate of Sears is still unclear, leaving thousands of jobs in jeopardy.
But the question of whether or not Sears and Kmart employees will receive their severance checks from the bankrupt retailer largely comes down to when they were let go.
Employees who were laid off shortly before the company filed for Chapter 11 bankruptcy protection in October are now technically unsecured creditors.
These ex-employees can only receive up to $12,850 under US bankruptcy law.
Sears and Kmart employees who lost their jobs after the bankruptcy filing might still be eligible to receive some severance, depending on case-specific court filings.
Sears isn’t officially doomed yet. Chairman Eddie Lampert placed a revised $5 billion takeover bid on Thursday. If accepted, Lampert’s bid would stave off liquidation, keep 425 stores open, and save around 50,000 jobs.
Still, it’s an uneasy time for the roughly 68,000 employees who work for Sears Holdings. Laid-off Sears and Kmart employees have even reported that they stopped receiving their severance checks after the retailers’ parent company declared bankruptcy in October.
This news sparked controversy, especially after it was revealed that millions of dollars had been set aside for conditional bonuses intended to tempt key corporate executives to remain with the company.
But Steven Solomon, managing director for corporate law firm GrayRobinson’s Miami office, said that Sears didn’t have much of a choice in the matter. When a company files for bankruptcy, it must immediately stop paying out severance. Employees let go before a bankruptcy filing are essentially out of luck, at least for the time being.
“It’s not even a voluntary decision on the part of the company,” he told Business Insider. “You are not permitted, absent court order, to continue to pay severance payments to those employees who were terminated prior to the filing of the bankruptcy.”
Sears did not respond to Business Insider’s request for comment.
The US bankruptcy code features a hierarchy of creditors. Laid-off employees who are owed severance are classified as unsecured creditors in the wake of a bankruptcy. Secured creditors, like financial institutions who’ve issued secured loans to a business, are paid off first when an estate goes bankrupt. Severance claims fall further down the list of prioritized creditors.
Solomon likened the structure to a “waterfall” — the money must flow through the secured creditors before cascading down to lower-priority groups.
So what happens if the funds dry up before they even reach the unsecured creditors?
“Very often, in big cases like this, the secured creditors will offer a carve out,” Solomon said. “That means that they will agree that some portion of their collateral can be liquidated for the benefit of unsecured creditors.”
Read more: Sears is getting one last chance to save itself from oblivion
Essentially, the secured creditors will save a piece of the pie for groups located further down the “waterfall,” usually as a result of some negotiation. Solomon added that bankruptcy judges often hold a negative view of cases …read more
Source:: Business Insider