The topic of severance pay employer insolvency is critical when a company enters insolvency proceedings. Many wonder whether they will still receive their severance pay. The answer is sobering: having a claim and actually getting paid are two different things. This article explains how severance pay is treated in insolvency proceedings and what you can do to protect your claims.
Severance Pay Employer Insolvency: What Employees Need to Know
Many employees assume that a promised severance package will still be paid out if the employer goes bust. Yet in insolvency proceedings, severance payments are treated like any other monetary claim — which often means you only see a fraction of the money. The size of that fraction depends on the insolvency quota, which varies from case to case.
The good news: statutory safeguards such as the insolvency benefit cover at least part of your wages. The bad news: a severance package is generally not included. Anyone counting on a promised severance payment must therefore expect significant shortfalls.
Entitlement to Severance Pay — When Does It Actually Arise?
There is no general statutory entitlement to severance pay. It arises only when specific conditions are met — for example, through a clause in the employment contract, a social plan in the event of a restructuring, or a termination agreement. In cases of redundancy dismissal, the employer may also offer severance pay, often as part of a settlement before the labour court.
If you want to learn more about the basics, read our detailed guide on severance pay after dismissal. There you will find everything on amounts, rules of thumb, and negotiation strategies.
Important: the entitlement to severance pay does not arise automatically from the dismissal itself. It must either be agreed contractually or enforced through a claim before the labour court. Especially in a company insolvency, it is crucial whether the claim arose before or after the opening of insolvency proceedings — this determines whether and how it is taken into account in the proceedings.
Insolvency Proceedings: How Severance Payments Are Treated
When a company files for insolvency, all outstanding creditor claims are collected and satisfied in a legally prescribed order. Severance payments arising from employment relationships generally fall under what are known as insolvency claims — i.e., claims that already existed at the time the insolvency proceedings were opened.
Insolvency claims are not paid in full; they are satisfied only at a quota. This quota depends on how much money remains after the insolvency estate is realised. In many cases it is well below 100 percent — often only 20 to 40 percent, sometimes even zero. That means: even if you have a legal claim to severance pay, you may receive only a fraction in the insolvency proceedings.
However, certain claims receive priority treatment — for instance, wage arrears that qualify as estate liabilities. Severance payments, by contrast, are generally not estate liabilities but ordinary insolvency claims. As a result, they rank lower and are often paid only in part or not at all.
Payout in Practice: Why the Quota Is Often Low
The insolvency quota varies from case to case. It depends on the size of the insolvency estate and how many creditors register their claims. In practice, quotas are frequently low because the company’s debts are high and the realisation of assets often yields little.
To make matters worse, many employees fail to register their severance claim in time. If the claim is not registered by the deadline, it is forfeited. The deadline is usually three months after publication of the opening of insolvency proceedings. If you miss this deadline, you lose any chance of a payout — even if your claim was perfectly valid.
So severance pay employer insolvency claims are unfortunately treated merely as insolvency claims, satisfied only at the applicable quota. There is no guarantee you will receive the full amount. That is why it is important to have realistic expectations and inform yourself early.
Insolvency Benefit as Protection — What It Covers and What It Doesn’t
If your employer becomes insolvent and files for insolvency, you are entitled to the insolvency benefit. This is paid by the Federal Employment Agency and covers your net pay for the last three months before the opening of insolvency proceedings. Its purpose is to prevent you from being left without income when wages stop.
Important: the insolvency benefit covers only remuneration — i.e., wages, salary, holiday pay, and similar payments. A severance package is not included. It is not covered by the insolvency benefit and is not assumed by the Employment Agency. That means: if you are expecting severance pay, you must be prepared for it to be handled in the insolvency proceedings — and not secured by the insolvency benefit.
After the employment relationship ends, you can apply for unemployment benefit. A severance payment can, under certain circumstances, trigger a blocking period if you terminate the employment relationship yourself or sign a termination agreement. In our article unemployment benefit, blocking period, and severance pay, you can learn when a blocking period applies and how to avoid it.
Securing Your Claims: Deadlines and the Right Steps
When your employer goes bust, swift action is essential. First, you should check whether a severance claim exists at all — for example, from a social plan or a termination agreement. If so, you must register this claim with the schedule of claims by the deadline. The deadline is usually three months after publication of the opening of insolvency proceedings.
In addition, you should consider whether you need to file an unfair dismissal claim. If you have been dismissed and the employment relationship has not yet ended, you have only three weeks to lodge a claim with the labour court. For more information, see our guide on unfair dismissal claims.
In many cases it is advisable to consult a specialist lawyer for employment law. They can assess whether your severance claim is enforceable in the insolvency proceedings and which deadlines you must observe. A lawyer can also assist with registering the claim and ensure you do not forfeit your rights.
Even if the prospects of a full payout are slim, it is worth initiating all legal steps. After all, even a low quota is better than no payment at all. And there are occasional special cases where severance payments are recognised as estate liabilities — for instance, if the dismissal occurs only after the opening of insolvency proceedings and the insolvency administrator agrees to a severance payment.
Conclusion: Realistic Expectations in a Company Insolvency
Severance pay employer insolvency is unfortunately no sure thing. Entitlement and actual payout must be strictly separated: just because you are owed severance pay does not mean you will receive the money. In insolvency proceedings, severance payments are treated like other claims and paid only at the quota — and that quota is often low.
Nevertheless, you should not give up. Register your claim on time, check whether you need to file an unfair dismissal claim, and seek professional support. With the right steps, you can at least salvage part of your severance payment and protect yourself from financial disadvantages.
In a company insolvency, you should have realistic expectations about severance pay — but also know that you are not powerless. Inform yourself early, act quickly, and get advice. That is how you safeguard your rights even in difficult times.
Note: This article is for general information purposes only and does not replace individual legal advice. For a free initial assessment of whether litigation funding may be an option for your case, you can contact RechtStark.