Severance Pay in Insolvency: What You Can Still Get

What does insolvency change about your employment?

First, the most important news: your employer’s insolvency does not end your employment. Under § 108 InsO, it continues unchanged once insolvency proceedings open. You still have to work (unless you’re released from duty), and you’re still owed your wages. What changes is who you’re dealing with: the insolvency administrator takes the place of management. They take over the employer’s role, decide on continued employment, release from duty and dismissals, and become your contact for all employment law questions from now on.

Just as important: protection against dismissal continues to apply in full during insolvency. Insolvency alone is not grounds for dismissal. If the insolvency administrator wants to dismiss you, they need a socially justified reason under the Dismissal Protection Act (KSchG), in practice usually operational grounds, and they must correctly carry out social selection (Sozialauswahl). Insolvency administrators make mistakes here too, especially when many dismissals happen in a short time. You can challenge any of these dismissals with an unfair dismissal claim.

One clock keeps ticking regardless: you must also file a claim against the insolvency administrator’s dismissal within 3 weeks of receiving it (§ 4 KSchG). If you let the deadline pass, the dismissal becomes effective no matter how flawed it was. Our deadline calculator for unfair dismissal claims shows you exactly how many days you have left.

Incidentally, the opening of proceedings is often preceded by preliminary insolvency proceedings: the court appoints a preliminary insolvency administrator, the business initially keeps running, often financed through what’s called insolvency benefit (more on that shortly). Legally, little changes for your employment during this phase, but it’s here that the course gets set for everything that follows. For what to do generally in the first days after a dismissal, see Received a dismissal: what now?

Insolvency benefit: your outstanding wages are secured

If your employer had already stopped paying wages before the insolvency, the state steps in: under § 165 SGB III, you’re entitled to insolvency benefit for outstanding pay from the last 3 months of your employment before the insolvency event. The insolvency event is usually the opening of proceedings; it also covers the dismissal of an insolvency petition for lack of assets and a complete shutdown of the business without an insolvency petition.

Insolvency benefit replaces your net pay for this period, capped at the contribution assessment ceiling for unemployment insurance. Besides your basic salary, it generally also covers other outstanding pay components from those 3 months, such as allowances or overtime pay. It doesn’t apply, however, to periods after proceedings open: from then on, your ongoing wages count as an estate liability and must be paid out of the insolvency estate.

The one deadline to note down right away: you must apply for insolvency benefit at the employment agency within 2 months of proceedings opening (§ 324 para. 3 SGB III). This is a strict cut-off deadline. Only if you miss it through no fault of your own can you catch up within a further 2 months after the obstacle is removed. Don’t rely on anyone reminding you: apply early. You’ll find all the information and forms directly at the Federal Employment Agency.

In practice, it often works like this: during preliminary proceedings, insolvency benefit is pre-financed through a bank so staff keep getting paid and the business stays attractive for a sale. Whether this is how it’s organised at your employer is something you’ll learn from the (preliminary) insolvency administrator or the works council. Either way, it doesn’t change anything about your own application: make sure yourself that your claims are fully recorded.

Notice period in insolvency: the cap under § 113 InsO

A special rule applies to notice periods in insolvency that catches many employees off guard: under § 113 InsO, the insolvency administrator can terminate your employment with a notice period of no more than 3 months to the end of the month, regardless of what your employment contract or a collective agreement specifies. Even a contractually agreed protection against ordinary dismissal, or a long notice period of 6 or 7 months under § 622 BGB, doesn’t survive this cap. If your regular notice period is already shorter than 3 months, the shorter one still applies.

Two things need to be kept clearly apart here:

• § 113 InsO only shortens the notice period, not your protection against dismissal. The insolvency administrator still needs a socially justified reason, must observe social selection, and must consult any existing works council. A dismissal that fails on these points is invalid, cap or no cap.
• You can claim compensation for the shortening. If the administrator gives notice using the shortened period under § 113 InsO even though you were actually entitled to a longer one, you can claim compensation for the early termination loss as an insolvency creditor (§ 113 sentence 3 InsO), essentially the lost earnings for the months by which your employment ends early. The catch: this claim is only an insolvency claim, you register it on the claims table and receive the distribution rate on it. The next section explains what that means.

Example: Sabine has worked at the company for 16 years, and her regular notice period is 6 months to the end of the month. The insolvency administrator gives notice using the 3-month period under § 113 InsO. The dismissal itself can be valid if the operational grounds and social selection are sound. For the 3 months of lost earnings caused by the shortening, Sabine can register a compensation claim on the insolvency table. Whether that ends up being 5 or 50 percent depends on the distribution rate of the proceedings.

A first indication of your negotiating position: Use the severance calculator to work out in 2 minutes what severance pay might realistically serve as a benchmark in your case.

What’s your severance pay still worth? Ranking decides

Now to the core question of this page. In insolvency, not every claim is worth the same: what matters is what rank it holds. For your severance pay, this is the decisive fork in the road, and it hinges above all on one point in time: the opening of insolvency proceedings.

Severance pay from before the opening: an insolvency claim with a distribution rate

If your severance pay was agreed before proceedings opened, say in a termination agreement, a court settlement, or a social plan from better times, and hasn’t been paid out yet, it’s usually just a plain insolvency claim under § 38 InsO. That means you can no longer demand it directly, but instead register it with the insolvency administrator on the insolvency table. At the end of proceedings, the remaining estate is distributed among all insolvency creditors, and you receive the distribution rate. This varies greatly depending on the case, but in many standard insolvencies it’s only a single-digit percentage. A promised severance payment of €30,000 can shrink to a few hundred or a few thousand euros. How high the rate will be in your proceedings can’t be seriously predicted in advance, it depends entirely on the estate and the other claims.

Severance pay agreed by the insolvency administrator: an estate liability

The picture looks completely different if the insolvency administrator themselves agrees the severance pay after the opening, for example in a settlement ending your unfair dismissal claim or in a new social plan. Liabilities created through the administrator’s own actions count as estate liabilities under § 55 InsO. They’re paid with priority out of the insolvency estate, ahead of the insolvency creditors and, in principle, in full. The same applies to your ongoing wages from the opening onward, if the administrator continues to use your labour.

One honest caveat belongs here: even estate liabilities are only as good as the estate itself. If it isn’t even enough to cover these priority liabilities, the administrator declares insufficiency of the estate, and even estate creditors then only receive a proportional share. That’s the exception, but it does happen. Whether and to what extent your specific claim holds real value can only be judged on a case-by-case basis.

The practical upshot is easy to remember: an old, unpaid severance promise is worth little in insolvency. Severance pay newly negotiated with the administrator, on the other hand, can be fully recoverable. That’s exactly why how and with whom you negotiate now matters so much. Outstanding claims such as holiday pay compensation follow the same logic, incidentally: what matters is whether they arose before or after the opening.

Want to know what amount is even at stake: The severance calculator gives you your personal benchmark figure before you talk to the administrator.

Social plan in insolvency: the cap under § 123 InsO

In larger waves of dismissals, the works council regularly negotiates a reconciliation of interests (Interessenausgleich) and a social plan with the insolvency administrator, providing severance pay for affected employees. This still works in insolvency, but with two statutory caps from § 123 InsO:

• Volume cap: the total amount of the social plan may provide up to 2.5 months’ pay per employee affected by the dismissals (§ 123 para. 1 InsO). This is an upper limit on the overall volume, not an individual claim: how the pot is distributed among those affected is set out by the works council and the administrator in the social plan, usually based on length of service, age and maintenance obligations.
• Estate cap: in addition, no more than a third of the estate that would otherwise be available for distribution to insolvency creditors may be used to settle social plan claims (§ 123 para. 2 InsO). If the estate isn’t sufficient, individual social plan claims are reduced proportionally.

The good news: claims from a social plan drawn up after the opening count as estate liabilities and therefore rank far better than old severance promises. The realistic expectation: because of the caps, social plan severance pay in insolvency is typically noticeably lower than at a healthy company. An administrator can also revoke a social plan predating the insolvency under the conditions of § 124 InsO; the details go beyond the scope of this page but belong in any case-by-case review. For what a social plan generally covers and the usual distribution formulas, see our glossary entry on social plans.

What matters for you personally: the social plan is a collective solution and doesn’t rule out individual negotiation. If you have solid grounds to challenge your dismissal, you can often achieve more through a claim, alongside or instead of the social plan severance pay. The next section shows how the two fit together.

Tactics: how to still secure severance pay in insolvency

The basic principle of any severance negotiation still applies in insolvency: there’s generally no statutory right to severance pay, it comes about through negotiating pressure. And that pressure against the insolvency administrator is created above all by filing a timely unfair dismissal claim.

The administrator’s calculation looks like this: if they lose the case, your employment continues, and your wages for the entire duration of proceedings burden the estate as an estate liability, the very estate they’re supposed to preserve for creditors. This risk is very real, especially with mass dismissals based on a vulnerable social selection or a flawed works council consultation. That’s why many unfair dismissal claims in insolvency proceedings, too, end in a settlement: you accept the termination, in return severance pay is paid, and it’s agreed as an estate liability, meaning it’s paid from the well-funded end of the ranking order. For more on the negotiating logic behind operational dismissals, see operational dismissal and severance pay.

Worked example: the rule of thumb meets insolvency reality

As a benchmark here too, the rule of thumb of 0.5 gross monthly salaries per year of service applies. It isn’t a legal claim but a negotiating anchor, and in insolvency it also has to be measured against the available estate. For what generally influences the amount, see severance pay amount.

Example: Markus has worked at the company for 12 years and earns €3,800 gross per month. As a benchmark, the rule of thumb gives 0.5 x 12 x €3,800 = €22,800. Now it comes down to ranking:

These figures are a worked example, not a promise. But they show the key point: in insolvency, what matters isn’t just how much you negotiate, but above all what rank the result ends up in. They also show the limit: with a thin estate, even the best negotiator won’t secure €22,800, a discount on the rule of thumb is the realistic outcome. Honestly calculated, a smaller, well-secured amount is almost always worth more in insolvency than a big number on paper. When thinking about net amounts, also factor in tax: the one-fifth rule (Fünftelregelung) can ease the burden on severance pay, details under severance pay and tax.

Work through your own example: The severance calculator gives you your personal rule-of-thumb benchmark in 2 minutes.

Transfer company: the standard tool in insolvencies

In larger insolvencies, you’ll almost always come across an offer that’s rare outside a crisis: moving to a transfer company. The idea: instead of a dismissal, you end your employment through a three-way agreement and move, for a limited time (often up to 12 months), into a dedicated employment company. There, you receive transfer short-time allowance, usually topped up by the employer, plus training and job-search support. For the insolvency administrator, this model has the advantage of quickly relieving the business of staff and making it more attractive to investors.

For you, a transfer company is neither automatically good nor automatically bad, it’s a trade-off: you give up your protection against dismissal and therefore your right to sue, and get time, money and training in return. Whether the trade is worthwhile depends on the individual case: the amount of the top-up, any additional severance pay, your chances on the job market, and how vulnerable an alternative dismissal would be. So never sign the three-way agreement under time pressure at the factory gate, even though short acceptance deadlines are designed to create exactly that pressure. Our glossary entry on transfer companies explains the basics and typical contract clauses.

Before signing the three-way agreement: Use the severance calculator to check what a negotiated solution could realistically be worth as a benchmark.

Transfer of business: when the business is sold out of insolvency

Many insolvency proceedings don’t end in liquidation but in a sale: an investor takes over the business or individual parts of it (transferring restructuring). This triggers § 613a BGB for you: your employment transfers to the acquirer with all rights and obligations, including your length of service. A dismissal issued solely because of the transfer of business is invalid. You can object to the transfer, but in insolvency you should weigh that very carefully: if you object, you stay with the insolvent employer and are usually first on the dismissal list there.

You should know two insolvency-specific points, both in outline: first, under case law, the acquirer isn’t liable for claims that arose before proceedings opened, such as outstanding wages; these remain insolvency claims in the proceedings. Second, such takeovers are often combined with staff cuts, transfer companies and new social plans, to hand the acquirer a smaller business. Whether a dismissal in this context really rests on a viable concept or improperly piggybacks on the transfer is a classic case-by-case question and a frequent point of dispute before the labour courts.

Unemployment benefit and suspension period in insolvency

If your employment ends during insolvency, unemployment benefit is your most important safety net. The basic rules:

• Dismissal by the administrator: if you’re dismissed, you generally don’t face a benefit suspension period (Sperrzeit), since you didn’t cause your own unemployment.
• Termination agreement and three-way agreement: caution is needed here. Anyone who ends their own employment without good cause risks a suspension period of usually 12 weeks. Whether good cause exists, for instance because a lawful operational dismissal was imminent anyway, depends on how the agreement is structured. Details under benefit suspension periods.
• Severance pay and unemployment benefit: severance pay is generally not offset against unemployment benefit. However, your claim can be suspended if your employment ends, in exchange for severance pay, before the applicable notice period expires. We explain how this works under severance pay and unemployment benefit.
• Reporting obligations: register as a jobseeker no later than 3 months before your employment ends, or within 3 days of finding out if the notice period is shorter. This applies even if you’re challenging the dismissal in court or moving to a transfer company.

In insolvency especially, it’s worth looking at how these pieces interact: a settlement with the administrator should be structured so the severance pay is secured as an estate liability and both the benefit suspension period (Sperrzeit) and the § 158 SGB III hold on benefit (Ruhen) are avoided. Together, these two factors decide what you end up with net.

Checklist: what to do now

Your employer’s insolvency is unsettling, but no reason to panic. Work through the following points and you’ll have the most important deadlines and claims under control:

1. Apply for insolvency benefit. Is your wages outstanding? File the application with the employment agency no later than 2 months after proceedings open (§ 324 para. 3 SGB III). Keep your payslips and employment contract ready.
2. Register claims on the table. Register all outstanding claims from before the opening (older unpaid wages, old severance promises, compensation under § 113 InsO) with the insolvency administrator on the insolvency table. The administrator informs creditors about the form and deadline for registration; take that letter seriously and respond in time.
3. If dismissed: keep the 3-week deadline. The filing deadline under § 4 KSchG runs against any dismissal, including one from the insolvency administrator. For first steps and a document checklist, see Received a dismissal: what now?
4. Don’t sign anything under time pressure. Not a termination agreement, and not a three-way agreement for a transfer company, on the same day it’s presented. Short acceptance deadlines are a negotiating tactic, not a legal obligation.
5. Register as a jobseeker. On time, at the employment agency, regardless of whether you’re taking legal action.
6. Get your situation reviewed. The rank of your claims, how vulnerable the dismissal is, how solid a settlement would be: this is specialist territory in insolvency, where an early assessment from lawyers specialising in employment law can be worth real money.

How can we help you?

Is your employer insolvent, and do you want to know what can still be salvaged from your claims and whether severance pay remains realistic? That’s exactly what we’re here for: we review your case together with lawyers specialising in employment law, tell you honestly what rank your claims hold and what’s achievable against the insolvency administrator, and negotiate the best possible outcome for you.

We carry the risk: purely success-based, no upfront cost. Start with an initial assessment using our severance calculator, it only takes 2 minutes.