Payment of Pre-Petition and Post-Petition Employee Severance Benefits

This article examines whether severance benefits promised to employees pre-petition may be paid after the employer has filed a chapter 11 bankruptcy petition. The answer depends on whether the severance benefits were payable based on length of service or in a single lump-sum payment, and whether the debtor is in a majority-or-minority-rule jurisdiction. For most debtors, pre-petition lump-sum severance benefits are not payable as an administrative expense. Severance benefits based on length of service must be allocated between pre- and post-petition service. This article does not deal with benefits provided under a collective bargaining agreement, which are governed under Section 1113 of the Bankruptcy Code and may be modified only with court approval