Bankruptcy Priorities at AT&T - bye bye 401K
The U.S. bankruptcy code allows businesses to either reorganize debts or shut down in an orderly fashion so creditors can be paid. The bankruptcy system establishes the priorities of creditors, said Wesley Avery, a bankruptcy attorney with Sulmeyer, Kupetz, Baumann & Rothman in Los Angeles.
Unpaid workers' salaries have high priority in claims against a firm -- behind only the IRS, which wants any outstanding taxes, and the attorneys and accountants who help with the bankruptcy filing. Workers are ahead of any creditors, secured or unsecured, meaning the likelihood they will be paid is pretty high.
"Congress viewed employees as having a special right to payment (because) their labor helped create assets from which other creditors will be able to realize value and because their wages are typically their sole source of income," Avery said.
Surprisingly, 401k contributions deducted from an employee's paycheck but not deposited into the account are not priority claims. Employees must get in line with other creditors for the return of this money. David Wray, president of the Profit Sharing/401k Council of America, said his organization is urging Congress to recharacterize this money as unpaid salary, since it came out of workers' paychecks.