How Bankruptcy Affects Your Job
Can bankruptcy hurt your current or future employment status?
If you’re considering bankruptcy, you may worry how it will affect your job. People who file bankruptcy face a lot of stigma. Some employers may think it’s evidence that you’re disorganized or bad at managing money, but that may not be fair to you.
The Bankruptcy Code contains several provisions that safeguard job applicants and employees from discrimination. The Fair Credit Reporting Act also offers some protection by limiting how employers can use credit screenings. But the protections are limited, and in the real world, discrimination can be tough to prove.
Know your rights, which jobs are more likely to be impacted by a bankruptcy filing, and which employers are most likely to discover it.
What Happens When You File Bankruptcy?
When you file bankruptcy, you’re petitioning a court for debt relief. One of the most common forms of personal bankruptcy is Chapter 7, also known as liquidation bankruptcy. Most of your debts are discharged in Chapter 7—meaning you don’t have to repay them—though some debts, like unpaid child support, back taxes, and student loans, aren’t easily dischargeable. Another common form of bankruptcy is Chapter 13, or reorganization bankruptcy, where you repay at least part of the debt.
Regardless of which type you file, the case will become public record. That means anyone, prospective and current employers included, can find it. But that doesn’t mean it’s easy for anyone to find. To access bankruptcy case records online, you have to create an account on the government’s Public Access to Court Electronic Records (PACER) system and, in some cases, pay to access the records.
How Does Bankruptcy Affect Your Job Search?
About 25% of employers conduct an employment credit check on applicants for some positions, while 6% check candidates’ credit regardless of the position, according to a 2020 nationwide survey conducted by the National Association of Professional Background Screeners and HR.com. Jobs with financial responsibilities, or those in government or management positions, may be more likely to check your credit because employees may be expected to handle sensitive information.
Whether you’re an applicant or a current employee, the Fair Credit Reporting Act requires employers to get your written permission before checking your credit. If they decline to hire you or take adverse action against you as an employee because of negative information in your credit report, they have to notify you and provide you a copy of the report they used to make the decision.
The best way to prevent a prospective employer from discovering your bankruptcy is to avoid positions that require you to handle money or confidential information since they’re likely to require a credit check. If you can’t avoid an employment credit check, be honest and provide any context you can to show that your financial problems won’t interfere with your job.
Ten states, along with New York City, Chicago, Philadelphia, and the District of Columbia, have passed laws banning the use of pre-employment credit checks for most jobs that don’t involve handling money or sensitive information.
Bankruptcy and Anti-Discrimination Law
Government employers can’t refuse to hire someone just because they’ve filed bankruptcy, according to Section 525 of the Bankruptcy Code. No employer, whether it’s a government or private employer, can fire someone solely based on a bankruptcy. But the statute doesn’t directly say that a private employer can’t refuse to hire someone because they’ve filed.
A majority of courts have interpreted the statute to mean that private employers can reject a candidate because of a bankruptcy. Even if an employer can’t make a decision based on your bankruptcy, they’re often still allowed to consider your financial history. By the time you file, you probably have substantial negative information on your credit reports that could be used against you.
Can You Lose Your Job for Filing Bankruptcy?
Your company can’t fire you, demote you, or take any kind of action against you just because of a bankruptcy. Your employer is also banned from discriminating against you because your spouse has filed. However, your employer could potentially fire or demote you if they think you behaved irresponsibly or unethically in acquiring the debt and that it is impacting your work as an employee.
The reality is that discrimination can be difficult to prove. If your employer fires you after discovering your bankruptcy but says you were dismissed due to subpar job performance, it could be tough to show that you were wrongfully terminated.
Will Your Employer Know You Filed?
In most situations, you’re under no obligation to tell your employer you’ve filed, and your employer won’t be notified just because you declared bankruptcy.
A few exceptions exist, however. If you file Chapter 13—the type of bankruptcy where you repay at least some debt—your employer’s accounting department would be contacted if you’re making payments through payroll deductions. You may also be required to disclose a bankruptcy to your employer if you have a security clearance or certain professional licenses.
Your employer can check your credit, but always needs to get your express permission before doing so.
If You Have a Security Clearance
Being financially irresponsible is what will most likely jeopardize your security clearance, not the actual bankruptcy. If your debt is due to medical bills or divorce, you’re less likely to lose your security clearance than you would if it’s the result of something like gambling or an addiction. Bankruptcy could even be seen as a positive because you’re taking steps to manage your debt.
However, if you lose your security clearance, you could be fired or demoted if you can no longer be trusted to handle sensitive information.
If You Use a Company Credit Card
If the statement goes directly to your employer and your employer is responsible for payments, you should be able to keep your company credit card after bankruptcy. However, if you’ve used the card for personal purchases or are liable for the balance, it’s more likely your company will be notified and take action. If you’re not sure about liability, talk to your human resources department and your attorney.
If You Hold Professional Licenses
Your licensing board may require you to report a bankruptcy. For example, those with a FINRA (Financial Industry Regulatory Authority) license are required to disclose bankruptcy on Form U4, including the circumstances, and provide it to their employer. Some boards will also publish records of bankruptcy. For example, the Certified Financial Planner Board of Standards publishes the names of any certificant who’s declared bankruptcy in the past five years, and keeps it on the site for up to 10 years.
If you lose a license or certification as the result of a bankruptcy, you could be terminated or demoted. But again, a licensing board will typically consider the circumstances surrounding the case and will rarely suspend or revoke your license for bankruptcy alone. Always check with your board’s rules, as well as your state’s rules, and consult with your attorney.
The Bottom Line
Unless you handle money or sensitive information on the job, you probably don’t have to worry about a current employer finding out about your bankruptcy. But if you’re applying for a job that requires a pre-employment credit check, in financial services or law enforcement, for example, be upfront. Tell the hiring manager what they’ll find before the credit check.
Providing context is helpful. If you got behind due to health issues or a job loss, you can make the case that your debt wasn’t the result of chronic money mismanagement. Even if overspending was what got you into trouble, a bankruptcy can show that you’re taking action to fix the problem.
Consumer Financial Protection Bureau. "I Filed for Bankruptcy. How Long Will That Appear on Credit Reports?" Accessed Nov. 19, 2020.
Professional Background Screening Association. "National Survey: Employers Universally Using Background Checks to Protect Employees, Customers and the Public." Accessed Nov. 19, 2020.
SHRM. "House Committee Passes Bill to Ban Employment Credit Checks." Accessed Nov. 19, 2020.
Federal Reserve Bank of Boston. "'No More Credit Score' Employer Credit Check Bans and Signal Substitution." Accessed Nov. 19, 2020.
Cornell Law School. "11 U.S. Code § 525. Protection Against Discriminatory Treatment." Accessed Nov. 19, 2020.
United States Courts. "Chapter 13 - Bankruptcy Basics." Accessed Nov. 19, 2020.
CFP Board. "CFP Board Discloses Bankruptcies by CFP Professionals." Accessed Nov. 19, 2020.