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Career Q&A: Contract workers can be left in lurch if business files for bankruptcy

 
Published Oct. 29, 2014

Q: I am a contractor for a company. After completing my last project, instead of a paycheck, I received an email informing me that the company was closed and filing for bankruptcy and that "someone" would be contacting those of us who still need to be paid.

A week later, I emailed the head of the company, my only contact there. I said I planned to file a claim in small claims court but would rather go through mediation to save us both time and money. He said he would do whatever he could, even if it meant paying me out of his own pocket, but a month has passed, and I still do not have a paycheck.

I have excellent records to cover the burden of proof, but my understanding is that if the company has filed for bankruptcy, it may not have to pay up even if I sue and win.

Is there any other recourse, or do I simply have to take the loss? (Lesson learned: If you sense the ship is faltering, abandon it while you can!)

A: I don't know what foresight could have helped you avoid this. If there's one thing we've learned in the last decade, it's that any ship can founder.

I turned to Nora Raum — who in addition to having practiced bankruptcy law since 1986 is a part-time newscaster at National Public Radio — for a rundown on the process. Spoiler alert: Your outlook isn't great.

When a company files for bankruptcy protection, all other claims and collection actions stop. If the company hasn't filed yet, you can go ahead and sue in small claims court, but be prepared to withdraw the suit if you receive "an official notice" — not an email — "prepared by the bankruptcy court," Raum says.

If the company closes and then files for bankruptcy protection, all its assets will be sold in a Chapter 7 liquidation. Any proceeds from the sale of the assets will be used to pay off creditors according to priority. Unpaid employees are among the first in line; independent contractors, however, have to meet specific criteria to be considered priority creditors.

I'm sure the owner had the best of intentions when he promised to pay you — but I wouldn't camp out by the mailbox. If he pays you within 90 days before closing and filing for bankruptcy, you could be asked to return the money to be split with the other creditors. Once bankruptcy proceedings begin, he has less incentive to pay you himself, and you're prohibited from pressuring him to do so.

To recap: If the company has filed for bankruptcy, and if it has assets to sell, and if any assets remain when your number is called . . . well, while you're waiting, you might as well ask your accountant about the possibility of deducting your loss on next year's tax return.

Own up to reason you lost your job

Q: I was fired from my job for violating company policy (using my cellphone on the floor). It's embarrassing and somewhat depressing to tell interviewers about it. I feel like I'm not going to get the job because of the violation, but I'm well qualified with the performance to prove it. Is there any way to relate this violation without being rejected for it? Should I give permission to contact my former employer? Is telling the truth the best thing when asked why I was fired?

A: If a simple "things didn't work out, and I was let go" doesn't suffice — say, the interviewer presses you for or is likely to gain access to the ugly details — the truth really is your only option.

But there's naked truth, and there's narrative truth. In the latter, you own what you did wrong and explain why it won't happen again. (Because it won't — right?)

You could say: "My performance was strong, but I had a bad habit of using my cellphone when I wasn't helping customers, which was against company policy. Now, I keep my phone switched off until I'm on my own time. Otherwise, my performance record should show that I'm a hard worker who delivers excellent service."

Practice in front of a friend or video camera until you master an honest, unflinching delivery. It's all right to look contrite, but don't grovel or ramble. Own it and move on.

Now try out your response on your former boss. Acknowledge that you understand why you had to be let go, and that it was the wake-up call you needed to make necessary changes. Ask if the boss is willing to share the positive things about your performance and character if contacted for a reference.

After that, keep your narrative in your back pocket until the situation calls for it. Ideally, you won't need to pull it out more than once for the rest of your life.