Suing Bankrupt Employer

One of the most important provisions under the Bankruptcy Code that affects employment discrimination, retaliation and wrongful termination claims asserted against the employer that files bankruptcy is the “automatic stay” under the Bankruptcy Code section 362. Immediately upon filing by the employer of a bankruptcy petition, the automatic stay takes effect and prevents the plaintiff employee / former employee from proceeding with his employment claim against the debtor. Any action taken by such an employee after filing of the bankruptcy petition contrary to the automatic stay will be void even if the employee is not aware of the employer’s bankruptcy filing. With certain exceptions, the automatic stay applies to all creditors, including plaintiff-employees with discrimination, harassment, and other claims.

If the employer files bankruptcy before the employee files the employment lawsuit, and the statute of limitations on the employment discrimination claim otherwise expires while the automatic stay is in effect, the employee will have until 30 days after the automatic stay is terminated to file the employment discrimination lawsuit, assuming that the claim is not discharged, otherwise extinguished, or resolved in the bankruptcy.
This 30-day period my be extended if the employee was not notified and didn’t have a reason to know that the stay was terminated.

If, however, the plaintiff’s lawsuit was pending at the time of the bankruptcy filing (that is, if the employee filed a lawsuit before the employer filed for bankruptcy), the suit may not continue and has to be stayed. Once, the employer emerges from bankruptcy, the stay will be lifted and the plaintiff can proceed with his action from the stage where it stopped when the petition for bankruptcy was filed.