How Will Bankruptcy Affect Your Job?

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You may have seen ads for bankruptcy attorneys on TV and might be thinking about filing a bankruptcy case. But now you're worried because someone told you that filing for bankruptcy could get you fired from your job.

Dealing with a heavy debt load can be burdensome, especially when there are many rumors about bankruptcy. But you should take comfort in the fact that bankruptcy (which is provided for in the Constitution) is available for people in just your position.

First, put your concerns to rest by getting more information about Chapter 13 and Chapter 7. Now, let's examine how bankruptcy really affects your career

Perhaps you remember this question on your job application: “Have you ever filed bankruptcy?” You might wonder why they’d ask a question like that if they don’t use that information in their hiring and firing decisions. The long and short of it is that there are some circumstances under which bankruptcy can have an effect on employment and other circumstances where it isn’t a factor and can be discriminatory. 

Can Your Employer Fire You When You File a Bankruptcy Case?

In a word, “no.” Your employer cannot fire just because you file bankruptcy. The bankruptcy code, which is federal law and contains most of the laws that affect a bankruptcy case in this country, has a provision that prohibits discrimination in a host of situations including employment. Section 525 reads:

"(a) . . .a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt—

  1. Is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;
  2. Has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or
  3. Has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act."

In a nutshell, the bankruptcy code tells us that once you’ve been hired, neither government nor private employers are allowed to discriminate against you just because you filed a bankruptcy case. The bankruptcy cannot be the sole reason that you are fired, laid off, denied a bonus, demoted, reprimanded, or otherwise disciplined. 

The issue isn’t so much whether the employer can discriminate. It’s whether the person who suffers the action can prove that the employer’s action was a direct result of a bankruptcy filing. There are any number of reasons an employer can cook up to justify firing an employee. In right-to-work states, an employer can fire a worker for virtually any reason or for no reason.

Even though the bankruptcy code prohibits an employer from discriminating on the job because of the bankruptcy alone, there is nothing that prohibits your employer from making employment decisions based on the circumstances that led up filing a bankruptcy case.

For instance, you might have had months or years of financial strife before you finally decided to get a fresh start with bankruptcy. Your credit record could show many slow pays, charge-offs, repossessions, and even lawsuits. That information might be of particular interest to your employer if you work in a job that is responsible for handling money. Your employer may not be able to use the bankruptcy as an excuse to take action against you, but the rest of your credit history is germaine and available to an employer who makes regular credit checks a condition of continued employment.

Can an Employer Deny You a Job Because of a Bankruptcy?

There’s an interesting glitch in Section 525 that a lot of people don’t notice. Section 525 addresses discrimination by government and by private employers, but it doesn’t apply the same standard to both. Section 525(a), the section on government employment, prohibits discrimination in virtually every aspect of government-employee relations. The government cannot, it reads, “deny employment to, terminate the employment of, or discriminate with respect to employment against” someone who has filed a bankruptcy case. (11. U.S.C. § 525(a).)

The code addresses private employers in Section 525(b). This separate paragraph does not include the phrase “deny employment to”. A number of courts have looked at this issue. Most, but not all, have held that Congress must have left the phrase out on purpose. Therefore, private employers are not prohibited from using bankruptcy as the basis for denying employment to a debtor.

You may not be looking for a job now, but if you need to in the future, you’re probably going to get that dreaded question on your employment application, “Have you ever filed a bankruptcy case?” You must answer truthfully. It doesn’t necessarily mean that you’re automatically out of the running for the job, but if you’re hired and your employer learns that you were not truthful on your application, you will likely be fired.

Also, keep in mind that if you work for a staffing company that supplies workers to government and military medical facilities, the bankruptcy code will offer no protection in the hiring process, but it will protect you once you're on the payroll.

Will Filing Bankruptcy Jeopardize Your Professional Licenses?

You might have spent years in school preparing for your chosen career. Now, you are licensed in more than one state to perform your professional duties and have joined the ranks thousands of other professionals, including doctors, lawyers, cosmetologists, insurance agents, pharmacists, and many other occupations. Most of these licensed professionals submit to background checks and often credit checks to qualify for their licenses.

The same section of the bankruptcy code that protects you from being fired also protects you from discrimination when you apply for your license. You cannot be denied a professional license solely because you filed a bankruptcy.

But, that is not the end of the story. Most professions require that their members meet standards, and those often include moral or character-based requirements. Some consider neglect of financial matters as one of the factors that could influence your licensing board.

Just as we will see in the security clearance process, states and regulatory authorities will dig into your background. Often, however, taking a lesson from the DoD security clearance playbook, the licensing bodies recognize that they must dig deeper sometimes to understand the true nature of the issues and how they relate to your ability to practice your profession.

Can You Be Denied or Lose a Security Clearance If You file Bankruptcy?

This is one case where filing bankruptcy can actually help you. Not only does filing bankruptcy not disqualify you from a security clearance, but it can actually enhance your chances of qualifying for one.

Most security clearances issued to government employees and to government contractors are investigated by the Department of Defense. The investigation is thorough, and the DOD looks at many areas of your life, far beyond your work history. Your financial health is of particular interest. The DoD reckons that people who are in a precarious financial position are vulnerable. The classic cold war scenario assumes that you could be blackmailed by a foreign power. But, even without the espionage angle, the DoD reasons that your money pressure could influence you to make unwise decisions or even break the law to get money. These are some of the things the DoD investigates: 

  • Are you unable or unwilling to pay your bills when they are due?
  • What are your spending habits? Do you consistently live above your means?
  • What is the source of your income?
  • Do you engage in gambling and drug or alcohol use that could cause financial issues or make you vulnerable to blackmail or other outside influences?
  • Have you committed any illegal acts, especially those concerning money (embezzlement, tax evasion, theft, fraud)?
  • Are your tax returns and tax payments up to date?

The DoD issues guidelines for its investigators and the guidelines specifically recognize that these conditions can be remedied by filing a bankruptcy case. That is how bankruptcy can enhance your ability to get and keep a security clearance. The DoD investigator will include that fact, and other evidence:  

  • How recent was the behavior?
  • Was it an isolated incident?
  • Did the person lack control over the conditions that resulted in the behavior (e.g., loss of employment, a business downturn, unexpected medical emergency, or a death, divorce or separation)?
  • Did the person receive or is the person receiving counseling for the problem? Are there clear indications that the problem is being resolved or is under control?
  • If the person achieved some sort of affluence, was it from a legal source?
  • Has the person engaged in a good faith effort to repay creditors or otherwise resolve debts?

After examining all of these facts, you can see that filing a bankruptcy case may not be as injurious to your career as you thought. It may actually benefit you in ways other than alleviating the stress of all that debt.