Ask a Lawyer: Can Bankruptcy Affect Your Job Prospects?

Filing bankruptcy means you get a fresh start after debt took control of your life. But, as you probably already know, the chance to start over does come at a cost. Can filing for bankruptcy affect your employment or job prospects?

Generally speaking, personal bankruptcy won't affect your current employment, though it could potentially prevent you from getting certain jobs in the private sector down the road. Read on to find out about the laws and practicalities that apply.

Will My Employer Find Out About My Bankruptcy?

You are not required by law to inform your employer if you file for Chapter 7 or Chapter 13 bankruptcy. In fact, it is rare for employers to find out this information.

It most commonly happens if your wages were previously being garnished and your employer has to be notified to stop the wage garnishment because the debt was discharged.

In another rare example, if you file for Chapter 13 bankruptcy, a few jurisdictions require that your debt reorganization payments be taken directly out of your paycheck, which would require your employer to be made aware of the situation. But this isn't common.

Finally, if your employer is one of your creditors due to wage overpayment or something similar, they will likely be informed of your filing.

If none of these situations apply and you choose not to tell your employer about your bankruptcy, chances are they won't find out.

Can I Be Fired or Turned Down for a Job Based on My Bankruptcy?

Even if your employer finds out about your bankruptcy filing, they cannot fire you for that reason alone. That's because federal law protects debtors from employment discrimination, which we explain in-depth in the section below.

However, if you have ever been asked to submit to a background check that includes a credit report during a job application process, you might be wondering how this is allowed.

Under current law, private-sector employees are not allowed to fire you because of your debtor status, but they can take it into consideration when making hiring decisions. Private-sector employers can also refuse to hire you if you don't give permission for them to check your credit history.

Most employers are not going to base their hiring decision on your credit alone unless it is directly related to the work you would be doing, such as bookkeeping or accounting. More often, it is one factor that is considered among many, including your work history, skills, and how well you interview.

If the issue does come up during the application or interview process, it's best to be open and forthcoming about the experience and frame it as something you learned from. Many, many Americans have bad credit or face serious credit card, medical, or student loan debt. This isn't something you need to be ashamed of when applying for a new job.

Discrimination Laws and Bankruptcy

As mentioned above, federal law prohibits both government and private-sector employers from discriminating against employees who have filed for bankruptcy protection.

The laws that prohibit discrimination against debtors who have filed bankruptcy are found in the U.S. Bankruptcy Code, which is the federal law that oversees bankruptcy proceedings.

Government Agencies

Section 525 of the Bankruptcy Code says that government agencies are prohibited from:

  1. denying employment to,
  2. terminating the employment of, or
  3. otherwise discriminating with respect to employment

against potential employees or employees on the basis of being a debtor.

In other words, federal, state, and local government agencies cannot refuse to hire, fire, or otherwise discriminate against people who file for bankruptcy.

Private-Sector Employers

Section 525 of the Bankruptcy Code uses slightly different language when it addresses private-sector employers. It says that private-sector employers are prohibited from:

  1. terminating the employment of, or
  2. otherwise discriminating with respect to employment

against employees on the basis of being a debtor.

Notably, the language that prohibits denying debtors employment is not included. Case law has interpreted this omission as intentional, and courts have held that private employers are permitted to deny employment to job applicants who have filed for bankruptcy, but not fire or otherwise discriminate against these individuals.

What To Do if You Are Discriminated Against

While it is against the law for employers to discriminate against people who file bankruptcy, it unfortunately still happens.

If you believe an employer or potential employer discriminated against you based on your bankruptcy filing, first make sure that the employer didn't have another acceptable reason for letting you go. It can be difficult to prove that your debtor status was the reason for your firing, especially if you had a history of showing up late or not getting your work done.

It can be equally, if not more, difficult to prove that you were turned down for a government job because of your bankruptcy filing. However, an experienced employment law attorney in your area can examine your case and determine if there is evidence of wrongdoing. If so, you may be able to file a wrongful termination or discrimination claim against your employer.

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