Unfortunately it is all too common for businesses to find themselves struggling with debt. It can be incredibly stressful to deal with a failing business at the same time that creditors, suppliers, and vendors are demanding to be paid. In order to save their businesses and get creditors off their backs, business owners often seek relief, either through help from the government or by filing for bankruptcy.

Government Bailout

Government bailout is typically not a debt relief option for small business owners. The government generally only steps in to help a company should its success or failure have a large impact on the economy. If a company going out of business will effect a large number of people through loss of jobs, loss of services, or loss of a particular product, then the government can step in and provide debt relief. For example, if a large power supply company was in financial trouble and their closing would result in people losing their electricity, then the government would most likely step in. The same has been seen in the automotive industry where thousands of people could lose their jobs should the company fail. That many people losing their jobs at once has an impact on the countries unemployment rate and hurts the economy.

Bankruptcy

Bankruptcy is an option that is more suited for smaller business owners and smaller corporations. A company in financial trouble can file for bankruptcy, therefore having most of their debt relieved. Bankruptcy prevents suppliers and creditors from trying to collect debt from the business. It also relives the business from judgments and protects both secured and unsecured accounts.

Types of Bankruptcy Filing

There are several types of bankruptcy filings including chapter 7, chapter 11, and chapter 13.

• Chapter 13 is usually for individuals but can sometimes be used by sole proprietor ships. Chapter 13 essentially helps the debtor to keep their home while having a payment plan in place to repay their debt.
• Chapter 7 is the most common form of bankruptcy for businesses. Basically the businesses’ assets are liquidated and sold off to repay the creditors. After the business has filed chapter 7 bankruptcy, creditors can no longer go after the business to recover its debt.
• Chapter 11 bankruptcy is usually only filed by large corporations or partnerships. Filing chapter 11 allows the company to form a plan to reorganize the business and petition to have debts reduced and/or negotiated. Chapter 11 filing usually helps the business stay in operation despite the financial difficulties and remain open until they come out of bankruptcy.

Goal

Whichever form of businesses debt relief a struggling business turns to for assistance they generally have the same goals. Ideally the business is looking for a way to get creditors to stop harassing them for payment. Secondly, they are trying to look for a way to save the business. No business owner wants to go through the stress of a business failing and will typically do anything reasonably within their means to save the business.

photo credit: Andres Rueda

If your company goes bankrupt what happens to your Pension?  Will you be left out in the cold?  Will the money you have been counting on for your retirement be gone?  Will you be forced into continuing to work, or even worse, be forced into returning to work after you have already retired?

Safeguards Against Losing Your Pension Plan

Fortunately, it is not as bad as most people think!  There are safeguards in the United States to prevent you from losing your pension plan.  In the United States every defined-benefit retirement plan is insured, at least to a point.  Most will receive all or at least most of their company pension even if your company goes bankrupt.  However, in some cases,  it may not be every penny you expected.   

What Happens When a Company Goes Bankrupt?

When a company goes bankrupt they have two choices.  They can reorganize and try to stay in business by reducing costs and attracting new investors, or they can liquidate.  The pension plan is usually terminated in reorganization and always terminated in liquidation.  So, then what happens?  A federal insurance agency called the Pension Benefit Guaranty Corporation (pbgc.gov), takes over the pension payments.  Only employees with the largest pensions actually take a hit.  The Pension Benefit Guaranty Corporation maximum annual payment, which rises with inflation, is $54,000 this year for workers who retire at age 65.  As with any insurer, the PBGC has some restrictions.  For example, it prorates recent pension increases.  However, in all, 84 percent of retirees get their full pension even after bankruptcy.

A Few Rare Cases Under Reorganization

In a few rare cases of a company bankruptcy reorganization, the employer maintains the its pension plan.  That normally only happens for one of three reasons.

1. The benefit is low
2. Employee turnover is high
3. The pension plan is new

Avoiding Bankruptcy is Better For The Company.

In most cases, however, it is always better for the company to avoid bankruptcy altogether.  In December of last year, Congress gave some help in this direction by relaxing the 2006 Pension Protection Act‘s strict rules governing pension funding.  As counter intuitive as it may seem, this is one move that endangered workers should embrace.  As a result of this move, according to Dallas Salisbury, president of the non-partisan Employee Benefit Research Institute, ” Given the economic downturn, employees are better off than if the company was forced to make a large pension contribution”.  “It’s better to stay in business than make a pension contribution”.

How Does This Affect Me?

I am actually receiving a pension from a large company that is not bankrupt.  I have been asked by many of my friends what will happen if the company I retired from goes under during these difficult times.  Thankfully, as a result of the above protections, I can answer them …  as far as my pension goes … not much!

Protection For Health Care Benefits Are Not The Same!

I wish I could say the same for the medical benefits.  They are not nearly as well protected.   In my last few years of employment, the cost of  health care benefits for retirees, which at one time were an excellent value were increased to the point where it was not affordable to maintain.  I was forced to purchase a private plan to hang in there until age 65 when Medicare kicks in!  It is my single largest monthly expense.  It’s not often you wish you were older but when it comes to health care insurance I can’t wait until I’m 65.  Papa B.