Severance Pay (Abfindung) in Insolvency: Where You Stand

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 when insolvency proceedings open. You still have to work (unless you’re released from duty), and you’re still owed your salary. What changes is who you deal with: the insolvency administrator takes the place of management. They take over the employer’s role, decide on continued employment, garden leave and dismissals, and are now your point of contact for all employment law questions.

Just as important: protection against unfair 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 socially justified grounds under the Protection Against Dismissal Act (KSchG), in practice usually operational reasons, and they must carry out the social selection (Sozialauswahl) correctly. Insolvency administrators make mistakes here too, especially when many dismissals are issued in a short time. You can challenge any of these dismissals with an unfair dismissal claim.

One clock keeps ticking unchanged: even against a dismissal by the insolvency administrator, you must file a claim within 3 weeks of receiving it (§ 4 KSchG). If you let the deadline pass, the dismissal counts as valid, no matter how flawed it was. To see exactly how many days you have left, use our unfair dismissal claim deadline calculator.

By the way, opening 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 known as insolvency benefit (more on that shortly). Legally, not much changes for your employment during this phase, but the course for everything that follows is set here. For what to do generally in the first days after a dismissal, see Received a dismissal: what to do?

Insolvency Benefit: Your Outstanding Pay Is Secured

If your employer already stopped paying your salary before the insolvency, the state steps in: under § 165 SGB III you’re entitled to insolvency benefit for outstanding wages 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 the 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. Alongside your base 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 salary is an estate liability and must be paid out of the insolvency estate.

The one deadline to note down right away: the application for insolvency benefit must be filed with the employment agency within 2 months of proceedings opening (§ 324 (3) SGB III). This is a strict deadline. Only someone who misses it through no fault of their own can catch up within a further 2 months of the obstacle ending. Don’t rely on anyone reminding you: file early. You’ll find all the information and forms directly at the employment agency.

In practice, it often works like this: during preliminary proceedings, insolvency benefit is pre-financed through a bank so the workforce keeps getting paid and the business stays attractive for a sale. Whether that’s how it’s organised at your employer, you’ll learn from the (preliminary) insolvency administrator or the works council. That changes nothing about your own application: make sure yourself that your claims are recorded in full.

Notice Period in Insolvency: The Cap Under § 113 InsO

A special rule applies to notice periods in insolvency, and it catches many employees off guard: under § 113 InsO, the insolvency administrator can give notice with a period of no more than 3 months to the end of a month, regardless of what your employment contract or a collective agreement provides. Even contractually agreed protection against 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 period stays in place.

Two things need to be kept clearly apart here:

• § 113 InsO only shortens the notice period, not the dismissal protection. The insolvency administrator still needs socially justified grounds, must observe the social selection and consult any existing works council. A dismissal that fails on these points is invalid, cap or no cap.
• You can claim damages for the shortening. If the administrator gives notice using the shortened period under § 113 InsO even though you were actually entitled to longer notice, you can claim compensation for the early termination as an insolvency creditor (§ 113 sentence 3 InsO), essentially the lost earnings for the months by which your employment ends sooner. The catch: this claim is only an insolvency claim, you register it in the table and receive the payout ratio 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 a 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 correct. For the 3 months’ lost earnings caused by the shortening, Sabine can register a damages claim in the insolvency table. Whether that ends up being 5 or 50 per cent depends on the proceedings’ payout ratio.

A first indication of your negotiating position: Use the severance calculator to work out in 2 minutes what severance pay would be a realistic benchmark in your case.

What’s Your Severance Pay Still Worth? Ranking Decides

Now to this page’s core question. In insolvency, not every claim is worth the same: it comes down to what ranking it has. For your severance pay, this is the switch that decides everything, and it mainly hinges on one moment in time: when insolvency proceedings open.

Severance Agreed Before Proceedings Opened: An Insolvency Claim With a Payout Ratio

If your severance pay was agreed before proceedings opened, for example in a termination agreement (Aufhebungsvertrag), a court settlement or a social plan (Sozialplan) from better times, and it hasn’t been paid out yet, it usually counts merely as an insolvency claim under § 38 InsO. That means you can no longer demand it directly, but must register it with the insolvency administrator in the insolvency table. At the end of proceedings, the remaining estate is distributed among all insolvency creditors, and you receive the payout ratio. This varies greatly by case, but in many standard insolvencies sits only in the single-digit percentage range. A promised severance payment of €30,000 can shrink to a few hundred or thousand euros this way. How high the ratio ends up being in your proceedings can’t be reliably predicted in advance, it depends entirely on the estate and the other claims.

Severance Agreed by the Insolvency Administrator: An Estate Liability

It looks very different if the insolvency administrator themselves agrees the severance pay after proceedings open, for example in a settlement ending your unfair dismissal claim, or in a new social plan. Liabilities created through actions of the administrator like these count as estate liabilities under § 55 InsO. They’re paid out of the insolvency estate with priority, ahead of insolvency creditors and generally in full. The same applies to your ongoing salary from the opening date onward, if the administrator makes use of your work.

One honest caveat belongs here: even estate liabilities are only as good as the estate. If it isn’t even enough for these priority liabilities, the administrator declares estate insufficiency (Masseunzulänglichkeit), and even estate creditors are then paid only proportionally. That’s the exception, but it does happen. Whether and to what extent your specific claim holds real value can only be assessed case by case.

The practical takeaway is easy to remember: an old, unpaid severance promise is worth little in insolvency. Severance freshly negotiated with the administrator, on the other hand, can be worth its full value. That’s exactly why how and with whom you negotiate now matters so much. Outstanding claims such as payment in lieu of unused holiday follow the same logic, incidentally: what matters is whether they arose before or after proceedings opened.

Want to know what amount is even at stake: The severance calculator shows you your personal benchmark figure before you speak 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 also works in insolvency, but with two statutory caps from § 123 InsO:

• Volume cap: the total amount of the social plan may provide for up to 2.5 months’ pay per employee affected by dismissal (§ 123 (1) InsO). This is an upper limit for the total volume, not an individual entitlement: how the pot is distributed among those affected is set by the works council and administrator in the social plan, usually based on length of service, age and maintenance obligations.
• Estate cap: in addition, settling social plan claims may use no more than a third of the estate that would otherwise be available for distribution to insolvency creditors without the social plan (§ 123 (2) InsO). If the estate isn’t enough, individual social plan claims are cut proportionally.

The good news: claims from a social plan set up after proceedings open are estate liabilities and therefore rank far better than old severance promises. The realistic expectation: because of the caps, social plan severance in insolvency typically comes out noticeably lower than at a healthy company. The administrator can also revoke a social plan predating the insolvency under the conditions of § 124 InsO; the details go beyond what we can cover here, but they belong in any case-by-case review. For what a social plan generally covers and how typical distribution formulas work, see our lexicon entry on social plans.

Important for you personally: the social plan is a collective solution and doesn’t rule out individual negotiations. If you have solid grounds to challenge your dismissal, you can often achieve more through litigation, alongside or instead of the social plan severance. The next section shows how this plays out.

Tactics: How to Still Get Severance Pay in Insolvency

Even in insolvency, the basic principle of every severance negotiation still applies: there’s generally no statutory right to severance pay, it results from negotiating pressure. And that pressure, even against the insolvency administrator, mainly comes from filing a timely unfair dismissal claim.

The administrator’s calculation looks like this: if they lose the case, your employment continues, and your salary for the whole duration of proceedings burdens the estate as an estate liability, the very estate they’re supposed to preserve for creditors. That risk is real, especially with mass dismissals involving a contestable 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, and in return severance pay is agreed as an estate liability, paid from the well-funded part 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

Here too, the rule of thumb of 0.5 gross monthly salaries per year of employment serves as a benchmark for the amount. It’s not an entitlement but a negotiating anchor, and in insolvency it also has to be measured against the 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 a month. The rule of thumb gives a benchmark of 0.5 x 12 x €3,800 = €22,800. Now the ranking is what matters:

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 ranking the outcome lands 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 more realistic outcome. Honestly calculated, a smaller but well-secured amount is nearly always worth more in insolvency than a large figure on paper. When looking at the net amount, don’t forget tax: the one-fifth rule (Fünftelregelung) can ease the burden on severance pay, details under severance pay and tax.

Run 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 encounter an offer rarely seen outside a crisis: moving into a transfer company (Transfergesellschaft). The idea: instead of a dismissal, you end your employment via a three-party agreement and move for a limited time (often up to 12 months) into a dedicated employment company. There you receive transfer short-time work 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 dismissal protection, and with it your right to sue, in exchange for time, money and training. Whether the trade is worthwhile depends on the specific case: the size of the top-up, any additional severance paid, your chances on the job market, and how contestable the alternative dismissal would be. So never sign the three-party agreement under time pressure at the factory gate, even though short acceptance deadlines are designed to create exactly that pressure. Our lexicon entry on transfer companies explains the basics and typical contract clauses.

Before you sign the three-party agreement: Use the severance calculator to check what a negotiated solution would realistically be worth as a benchmark.

Business Transfer: 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 (a transferring restructuring). For you, § 613a BGB then applies: your employment transfers to the buyer with all rights and obligations, including your length of service. A dismissal issued solely because of the transfer is invalid. You can object to the transfer, but in insolvency you should weigh this very carefully: anyone who objects stays with the insolvent employer and usually ends up first on the dismissal list there.

You should know two special features of insolvency, both in outline: first, according to case law, the buyer isn’t liable for claims that arose before proceedings opened, such as outstanding pay; these remain insolvency claims within the proceedings. Second, such takeovers are often combined with staff cuts, transfer companies and new social plans to hand the buyer a downsized business. Whether a dismissal in this context really rests on a viable concept or improperly ties in with 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 in insolvency, unemployment benefit is your most important safety net. The basic rules:

• Dismissal by the administrator: if you’re dismissed, you generally don’t risk a suspension period, since you didn’t cause your own unemployment.
• Termination agreements and three-party agreements: caution is needed here. If you end your own employment without good cause, you risk a suspension period, usually 12 weeks. Whether good cause exists, for instance because a lawful operational dismissal was imminent anyway, depends on how it’s structured. Details under benefit suspension period.
• Severance pay and unemployment benefit: severance is generally not offset against unemployment benefit. However, your claim can be suspended if your employment ends against severance pay before the relevant notice period expires. We explain how this works under severance pay and unemployment benefit.
• Notification duties: register as a jobseeker at the latest 3 months before your employment ends, or within 3 days of finding out if the notice is shorter. This applies whether you’re challenging the dismissal in court or moving into a transfer company.

In insolvency especially, it’s worth looking at how these interact: a settlement with the administrator should be structured so that the severance is secured as an estate liability and both suspension and pause periods are avoided. Together, these two factors decide what actually lands in your pocket net.

Checklist: What You Should Do Now

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

1. Apply for insolvency benefit. Is pay outstanding? File the application with the employment agency at the latest 2 months after proceedings open (§ 324 (3) SGB III). Have your payslips and employment contract ready.
2. Register claims in the table. Register all outstanding claims from before proceedings opened (older unpaid wages, old severance promises, damages under § 113 InsO) with the insolvency administrator in the insolvency table. The administrator informs creditors of the form and deadline for registration, take this letter seriously and respond on time.
3. If dismissed: keep the 3-week deadline. The filing deadline under § 4 KSchG runs against every dismissal, including one from the insolvency administrator. First steps and a document checklist under received a dismissal: what to do?
4. Don’t sign anything under time pressure. Not a termination agreement, and not a three-party agreement for a transfer company, on the same day it’s handed to you. Short acceptance deadlines are a negotiating tactic, not a legal requirement.
5. Register as a jobseeker. On time, with the employment agency, regardless of whether you’re filing a claim.
6. Get your situation reviewed. The ranking of your claims, how contestable the dismissal is, how solid a settlement really is: this is specialist territory in insolvency, and an early assessment by lawyers specialising in employment law can be worth real money.

How Can We Help You?

Is your employer insolvent, and you want to know what can be salvaged from your claims, and whether severance pay is still realistic? That’s exactly what we’re here for: we review your case together with lawyers specialising in employment law, tell you honestly what ranking your claims have and what’s enforceable 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.