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What if your company fails?
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January 23, 2002: 5:04 p.m. ET
Five ways to protect your finances and career when your employer goes bankrupt.
By Staff Writer Victoria Zunitch
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NEW YORK (CNN/Money) - Your employer files for bankruptcy and needs to keep the business going, so it asks you to keep working hard and not worry about anything.
You'll probably get paid for a while, but you definitely should worry, the experts say. Better yet, make plans.
Companies reorganizing under Chapter 11 of the U.S. Bankruptcy Code intend to fix the business and get out of bankruptcy, eventually. To do this, they usually obtain what's called debtor-in-possession financing to cover operating expenses like current payroll, expense reimbursements and vested benefits, bankruptcy experts say.
But a bigger part of fixing the business is to cut costs drastically, so employees of bankrupt companies need to review any part of their life that's affected by the company, from career goals to retirement.
One: Start looking for another job
The best you can do for yourself if your company goes belly-up is start looking for a new job right away, even if the bankrupt company promises you a retention bonus or job protection, says John Challenger, CEO of executive outplacement firm Challenger, Gray & Christmas. Get your resume together and start networking immediately, he recommends.
You can always turn down a new offer if it isn't better than your current job, Challenger says. But you must keep looking, because layoffs are common at bankrupt companies and many times the reorganization doesn't succeed.
You may or may not need to hide the fact that you're looking, Challenger says. Some companies are understanding of their employees' need to look for new jobs. Other times, he says, there are significant odds that the company will survive and you'll keep your job. In these cases, you might want to be discreet about your job search.
Two: Ask for a retention bonus
It's counterintuitive, but you might be able to earn more than ever from your bankrupt employer by getting a retention bonus. Bonuses help bankrupt companies keep key employees so they can improve the business. Often, they're doled out over time to make sure employees don't take the money and run, and they're usually tied to performance, bankruptcy experts say.
Bonuses usually apply only to a few employees, so if you're going to ask for one, do it early. The bankruptcy judge has to approve the company's budget, and you'll want to make sure your name is on the list when the bonus plan goes to the judge for approval.
If the answer is "no," Challenger says, all the more reason to look for a job, but don't panic. "That list may be very small, so you don't want to take it too severely," Challenger says.
Three: Review your benefits
In a bankruptcy, everything is on the table: salary, severance, group insurance, pension plans, and work/life benefits such as day care.
"It's a good idea to sit down with everyone you're working with and figure out if everything is still in line," says Doug Flynn, a CFP with financial planning firm Flynn Zito Capital Management in Garden City, N.Y.
This can be a time-consuming process. Your employer probably won't have all the answers right away. "Part of the planning is to try to get a hold on exactly what is changing, and it's hard to do that," Flynn said. You may have to persist in asking a lot of questions, he says.
Most people depend a lot on employer-sponsored group life, health and disability plans, Flynn says. Even those already retired may be affected if they're counting on post-retirement health insurance, he points out.
Employees will need to stay informed about any plan changes and may need to buy additional insurance.
Four: Give special attention to your retirement plans.
Defined-benefit plans may be at the greatest risk, says James Delaplane, vice president of retirement policy at the American Benefits Council. Companies manage those investments themselves, and if they can't cover the costs, they're only partially insured by the federal Pension Benefit Guaranty Corporation (PBGC).
A PBGC spokesman said the agency pays a maximum monthly benefit of $3,579.55 to people aged 65 for plans terminated in 2002. Coverage is lower for younger people. Those who are owed more will lose money, although the spokesman said a statistical sample recently showed that 95% of the employees in plans it took over received 100% of the benefits owed to them under the employer's plan.
With a 401(k) plan, your money and any vested employer contributions are locked in as soon as your paycheck deductions are made, Delaplane says. But you could lose future benefits if the company terminates the plan or replaces it with a lower-cost plan. It may eliminate matching contributions or change the vesting schedule, for example. Also, any part of your 401(k) that's invested in your company's stock will suffer as the company's performance deteriorates.
Retirement planning is one of the situations that Flynn says you may want to discuss with your financial adviser.
Five: Consider hiring a lawyer
Although it's not commonly done, you may want to think about hiring a lawyer to help you represent your interests and guide you through the process. A company is supposed to, under the supervision of a judge, fulfill any obligations it enters into after it files for bankruptcy. So if the company makes any promises to you while it's bankrupt, you should get them in writing and may want to have a lawyer review the documents.
Any obligations the company had before the filing will be fought over by all of the creditors and paid out, if at all, to the tune of cents on the dollar. Employees, just like any other creditor, can file claims with the court to try to recover some money. Here, a lawyer can help you fill out the paperwork and meet the court's strict deadlines.
And remember, just because a company intends to reorganize doesn't mean it will be successful. Defunct airline TWA filed for bankruptcy three times. In the end it sold its business to American Airlines' AMR Corp. (AMR: up $0.05 to $24.29, Research, Estimates) in 2001.
By definition, bankruptcy is a world inhabited by companies that have trouble keeping promises. It's a world where promises aren't kept and there isn't enough to go around, says Stephen Bobo, a bankruptcy attorney with the Chicago law firm D'Ancona & Pflaum. 
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