Democratic presidential candidate Elizabeth Warren wants to change the way bankruptcy works in America. Warren’s plan would give everyday workers a better chance of getting severance when a company goes belly-up. And executives at companies that enter bankruptcy would no longer be allowed to pocket bonuses. But most of all, she wants to prevent companies from going bankrupt in the first place. Warren plans to accomplish that by making private equity firms responsible for the debts they add to companies’ balance sheets when they buy businesses, and by eliminating some tax incentives for taking on debt. Private equity investors would also have to fund certain pensions, so companies continue to pay workers’ retirement benefits in bankruptcy. Warren likens private equity firms to pirates, loading companies up with too much debt, slashing workers and collecting profit, all while using bankruptcy as an exit strategy. “Let’s call this what it is: legalized looting — looting that makes a handful of Wall Street managers very rich while costing thousands of people their jobs, putting valuable companies out of business, and hurting communities across the country,” Warren wrote in a blog post. But bankruptcy is complex. The system is designed to maximize the amount of money stakeholders — including employees — are owed when a company cannot pay its debts. In the best case scenario, a business can emerge healthier and continue to serve the economy and their employees. In the worst-case scenario, companies go out of business and liquidate, leaving workers out of a job, a paycheck, and severance. A private equity owner could also lose money. Warren’s plan could leave workers with more money in a worst-case scenario. But skeptics note her proposition could hurt companies’ chances at the best-case scenario — a bankruptcy that leaves a business operational and lets employees keep their jobs. Getting paid your worth This isn’t the first time that Warren, who previously lectured on bankruptcy law at Harvard, has spoken out in favor of worker compensation. Last year, when Toys “R” Us went through bankruptcy, Warren advocated for a severance fund for workers. The company’s private equity backers Bain Capital and KKR\n \n (KKR) set up a fund, which agreed to pay out $20 million to laid-off workers. The toy retailer’s liquidation resulted in more than 30,000 lost jobs across the country. Employees aren’t at the top of the pecking order in a bankruptcy. Creditors, which lend money secured on assets a company owns, are paid first. Creditors that lend money under riskier conditions — unsecured creditors — come next. At the bottom of the pile are the owners of a business, or equity holders. Employee pensions are protected through the Pension Benefit Guaranty Corporation, which takes over the pension benefit payments in case of bankruptcy, although payments could be smaller. Some employees’ claims are at the same level as the unsecured creditors. The problem is the pot of money available will have shrunk down significantly by the time employees stand to get paid. Particularly when a company is liquidating, there’s usually not a lot left to distribute, and employees have to take haircuts on the money they are owed. Warren wants to change this priority of payments so workers have a better shot at getting paid. The devil is in the details In practice, Warren’s bankruptcy plan might not achieve the worker protections it seeks. Warren’s Stop Wall Street Looting Act proposes to up the amount of protected wages, salaries and commissions – including severance, a Warren aide told CNN Business. Those kinds of payments are treated with a higher priority in case of bankruptcy. Currently, priority payments to workers are capped at $10,000 and only apply to wages earned in the six months before the company filed for bankruptcy. Under Warren’s changes, the amount will be upped to $20,000 and the time limit will be nixed. But the employees who usually make use of priority wages are executives, noted Adam Levitin, a law professor at Georgetown, who assisted Warren in drafting the bill. A worker with a smaller paycheck might walk away from a business in bankruptcy to find another job, rather than continuing to work without a salary to then be paid as part of the bankruptcy proceedings. According to the American Investment Council, 5.8 million Americans work in private equity-backed companies. But they’re not all doomed to lose their jobs in a bankruptcy. “The number of true liquidations where the company fully shuts down are very low,” noted Levitin. “If a company reorganizes, which is the point of our bankruptcy code, workers retain their jobs,” said Tom Morrow, executive director of the Association of Insolvency and Restructuring Advisors. And some of Warren’s proposed employee-friendly regulations are already taking place without any government intervention. Companies en route to filing for bankruptcy often chose to pay their workers before defaulting on a bigger payment, such as interest on debt, he said. “If you have any hope on a restructuring, you want to keep your work force,” Levitin added. So the incentive for companies to treat their employees well is already there. That said, employees can be let go in restructurings too. Discouraging lenders Workers wouldn’t be the only ones affected by a change in the order of payments. Investors in corporate loans or bonds would be impacted as well. Issuing debt may allow companies to invest and turn their businesses around. Changing the terms for lenders or debt holders could make it less attractive to lend to companies in distress. By the time a company files for bankruptcy, its debt has usually changed hands many times and is worth only cents on the dollar. But investors are protected if their debt is secured on company assets, which also lets them get paid first. If this goes away, creditors might be less likely to lend to businesses in distress, voiding them of the chance to restructure and become a healthy business again. “The bill strikes a careful balance between maintaining access to credit for businesses and strengthening protections for workers who are employed by companies that enter bankruptcy,” Warren’s aide said. Smaller business at a loss The bill also doesn’t address smaller businesses. “The place the system falls short is really the smaller companies that can’t afford the costs of the bankruptcy procedure,” said Tom Morrow, executive director of the Association of Insolvency and Restructuring Advisors.[if the first Morrow quote stays, his title can go here] “Those are the ones that end up liquidating. Larger companies reorganize and have the money to do it,” Morrow said. America’s bankruptcy code is arguably the most sophisticated one in the world and a big part of how business-friendly the United States is. But it’s not perfect. Warren’s bill could iron out some problems, but it can’t tackle everything.