Ask a lawyer: How can bankruptcy affect your job prospects?

You can file bankruptcy to get a fresh start after your debts have taken control of your life. However, you already know that the opportunity to start again comes with a price. What effect can bankruptcy have on your job prospects and employment?

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Personal bankruptcy will not affect your employment. However, it can potentially hinder you from obtaining certain jobs in the private sector. Learn more about the laws and practicalities.

What will my employer find out about my bankruptcy?

If you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy, your employer is not required to know. Employers are unlikely to learn this information.

This happens most often if wages were garnished previously. Your employer must be notified to stop garnishment of wages because the debt has been discharged.

Another rare situation is when you file Chapter 13 bankruptcy. Some jurisdictions require that your debt restructuring payments be taken directly from your paycheck. This would mean your employer must be informed. This is not a common practice.

Finally, your employer may be one of your creditors because of wage overpayments or similar. They will likely be informed about your filing.

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If none of these circumstances apply, and you decide not to tell your employer about bankruptcy, there’s a good chance they won’t.

What if my bankruptcy makes it difficult to get a job?

Your employer cannot fire you based on your bankruptcy filing. This is because the federal law protects debtors against discrimination in employment. We explain this in detail in the section below.

You might wonder if it is possible to have a background check which includes credit reports as part of job application processes.

Private-sector workers cannot fire you for your debtor status under current law. However, they can consider it when making hiring decisions. Employers in the private sector can refuse to hire you if they don’t have permission to review your credit history.

Employers won’t base their hiring decisions solely on your credit score unless it is directly relevant to the job you are applying for, such as bookkeeping and accounting. It is often one factor among many factors, such as your work history, skills and how well you interview.

It’s best to openly discuss the matter during an interview or application process. Frame it as something that you have learned from. Many Americans have poor credit scores or are in serious debt from student loans, medical bills, and credit cards. You don’t have to feel ashamed about this when you apply for a job.

Bankruptcy and Discrimination Laws

Federal law, as mentioned above, prohibits government and private sector employers from discriminating against bankruptcy filings.

The U.S. Bankruptcy Code is the federal law that governs bankruptcy proceedings and contains the laws prohibiting discrimination against bankruptcy filers.

  • Government Agencies
  • Section 525 of Bankruptcy Code states that government agencies are forbidden from:
  • Denying employment to,
  • Terminating the employment of
  • Discriminating in employment
  • Against potential employees or employees based on being a debtor.

This means that federal, state and local government agencies can’t refuse to hire, fire or discriminate against bankruptcy filers.

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Employers in the Private Sector

When it refers to private-sector employers, Section 525 of Bankruptcy Code uses slightly different language. It states that private-sector employers are forbidden from:

  • Terminating the employment
  • Discriminating in employment
  • Employees are discriminated against on the grounds of being a debtor.

Noticeably, the language prohibiting denial of employment to debtors is not included. This omission has been interpreted by case law as intentional. Courts have held that private employers can deny employment to job candidates who file for bankruptcy. However, they cannot fire or discriminate against them.

What to do if you are discriminated against?

Although discrimination against bankruptcy filers is illegal, it still happens. First, ensure that your employer or potential employer did not discriminate against you because of your bankruptcy filing. It may be difficult to prove your bankruptcy status as the reason you were fired, especially if your past history includes late attendance or missing work.

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It can be difficult, if not harder, to prove that your bankruptcy filing caused you to be turned down for a job with the government. An experienced employment lawyer in your local area can review your case and determine whether there is any evidence of wrongdoing. You may be eligible to file a wrongful termination claim or discrimination case against your employer if you believe there is.