How Filing Bankruptcy Affects Your Job

Road Sign with words "Bankruptcy Next Exit"
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Many people fear that filing bankruptcy means their job will be in jeopardy. Chances are, though, your you won't be in danger of losing your job. In fact, filing bankruptcy may actually help your employment situation.

There are times when an employer can use your bankruptcy filing to make employment decisions and bankruptcy can affect your security clearance, professional license, and corporate credit cards. 

This is one of the trickiest questions a bankruptcy lawyer has to answer. A bankruptcy can play into a lender’s decision to give you a loan, an insurance company’s decision to insure you, and a landlord’s decision to rent to you.

You would think that a bankruptcy could affect whether you could get or keep a job. In a perfect world, there would be no bankruptcy stigma and these businesses would see bankruptcy as a tool that actually resolves financial issues and makes the debtor a better borrower, insured, renter, or employee. That is, unfortunately, not the case.

Officially? The bankruptcy code has an anti-discrimination section that prohibits employment discrimination based solely on a person’s bankruptcy filing. But, it’s difficult to police and prove.

Bankruptcies also have an origin in some other crisis, like a medical problem, divorce or unemployment. Sometimes a bankruptcy is an attempt to correct what some employers might see as a moral or character failing, like a cavalier attitude toward money, excessive gambling, drug or alcohol abuse, or criminal behavior.

There are very few restrictions on an employer’s actions based on the circumstances that led to the bankruptcy. Therefore, it's often difficult to tell whether the employment decision is because of the bankruptcy or because of the circumstances that led to the bankruptcy, which of themselves may be legitimate factors for an employer to consider. 

The Bankruptcy Code’s Anti-discrimination Provisions

Section 525 of the bankruptcy code has several sections. The original one prohibits a governmental unit from discriminating against someone who filed bankruptcy for a whole host of transactions like permit applications, charters, and licenses. 

As to employment, Section 525(a) tells us that the federal government cannot “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 next subsection, which was added later, applies to private employers, but it does not reach the same breadth as the subsection on government discrimination. Section 525(b) tracks the language in 525(a) except that it eliminates the phrase “deny employment to”.

Here are some common employment-related issues that debtors can face.

Bankruptcy and Being Denied a Job

There is an interesting issue here, and apparently one big loophole in the bankruptcy code’s anti-discrimination provision. According to Section 525(a) of the provision, Government units cannot “deny employment to” someone who has filed a bankruptcy case. The courts have interpreted this wording to be very plain and very broad.

The subsection that applies to private employers, 525(b), has no wording at all with respect to denying employment, although the rest of the phrasing on discrimination against an employee, tracks the wording for governmental units.

Most courts (but not all) that have considered this issue have reasoned that because Congress could have, but did not, include the phrase in the private employer subsection, it must have intentionally chosen to allow private employers to deny employment to someone who has filed bankruptcy. They have declined to see it as an oversight.

In the long run, it may not matter. Even if the bankruptcy code prohibits a private employer from using bankruptcy to discriminate in the hiring decision, the code does not prohibit that employer from considering other factors possibly relevant factors, like credit history, gambling, drug or alcohol use, lawsuits, criminal behavior like embezzlement and fraud.

In fact, employers often require that a job candidate sign a release to allow the employer to pull a credit report. Employers cannot pull a credit report without permission, but they can refuse to consider someone who will not sign a release.

Bankruptcy and Your Employer

If you file a Chapter 7 case, your employer probably never has to know. Bankruptcies are public filings available to anyone who wants to see the files but most people don't have a reason to access them and don't know how to access them.

You must list all creditors in your bankruptcy paperwork so that the court can notify them of the case. If you file a Chapter 7 case, there is no reason to list your employer’s name and address unless you owe your employer money.

A Chapter 13 bankruptcy case is a little different. Chapter 13 repayment plans are administered by Chapter 13 trustees, who take in your monthly payment and distribute it to the creditors who have filed proper claims in your case.

Many Chapter 13 trustees require that debtors who are employed have their payments taken directly from their paychecks, similar to a garnishment. The court will issue an order to the employer with instructions on how much and where to send the money. 

This doesn't necessarily mean that your supervisor will find out about your bankruptcy. But some employees will be concerned that their jobs could be affected, despite Section 525's anti-discrimination language. In my experience, courts are willing to allow some employees to avoid a wage order, especially for employees with jobs that involve dealing with money or credit decisions. 

Bankruptcy and Your Job

You cannot be fired just because you filed a bankruptcy case. The language of Section 525 for both governmental units and private employers very clearly prohibits terminating employees. But it has also been interpreted by the courts to include actions like reducing your hours, cutting your salary, demoting you, or taking away responsibilities.

So, what happens if your employer finds out about your bankruptcy and shortly after takes some action that you interpret as being a direct response to your bankruptcy case? In reality, there may be any number of reasons, other than bankruptcy, for an employer to make drastic changes in your job situation. Tying any of those to a bankruptcy will often be next to impossible, especially if the employer can base those same decisions on the factors that could have led to the bankruptcy.

In civil rights cases, sometimes a court will look to a pattern of discriminatory outcomes if direct evidence is not available. For instance, if an employer rejects every black candidate, that would be strong proof that the employer was making hiring decisions based on race. If an employer takes action against every employee that files bankruptcy, that could be powerful proof.

Bankruptcy and Your Security Clearance

The likelihood that you will lose a security clearance because of a bankruptcy case is virtually nil. But, like other employment contexts, the reasons why you filed bankruptcy could have a bearing on the decision. On the positive side, the bankruptcy itself could work in your favor.

Most security clearances are issued by the Department of Defense after a thorough investigation that will cover many areas of your life. The DoD looks at financial issues in particular because people with money issues are more vulnerable to blackmail. There is also a fear that they will take risky actions or commit crimes in an attempt to get money. The DoD will consider:

  • whether you are unable or unwilling to pay your bills as they come due
  • your spending habits and whether you consistently live above your means
  • the source of your income
  • gambling and drug or alcohol use that might lead to financial issues or make you vulnerable to blackmail or other outside influences
  • any illegal acts you’ve committed, especially those concerning money like embezzlement, tax evasion, theft, or fraud
  • status of your tax filings and payments

But this is not the end of the story. The DoD recognizes whether the issues were outside the control of the person or whether the person has taken steps to correct the situation. Specifically, the Department of Defense will consider evidence that: 

  • the behavior was not recent
  • it was an isolated incident
  • the conditions that resulted in the behavior were largely beyond the person's control (e.g., loss of employment, a business downturn, unexpected medical emergency, or a death, divorce or separation)
  • the person has received or is receiving counseling for the problem and there are clear indications that the problem is being resolved or is under control
  • the affluence resulted from a legal source, and
  • the individual initiated a good-faith effort to repay overdue creditors or otherwise resolve debts

Filing bankruptcy can be a strong indication to the DoD of your intention to improve or eliminate your financial issues. 

Bankruptcy and Your Professional License

Many professional people must have a license, which is only granted after a thorough application process and background and criminal checks. The bankruptcy code prohibits discrimination by a licensing authority just because an applicant filed bankruptcy.

It is also true that professions require their members to adhere to certain standards of fitness and character. Those standards often require that the professional maintain control over finances. But, just as the Department of Defense will look deeper, licensing authorities will, too, and will expect the professional to explain the circumstances.

If you’re a professional, check with your governing body for notification requirements. You may be required to inform your licensing authority when you file a bankruptcy case.

Bankruptcy and Your Company-Issued Credit Card

If your company issued you a credit card to use for travel expenses or supplies, the chances are good that you are more than just an authorized user. To protect the issuer and the employer, many credit card companies (especially American Express) and employers require that the cardholder co-sign on the account. 

Employers may restrict the use of the card to only employment-related purchases, but that will not necessarily stop an employee from making personal use of it. Other employers negotiate other arrangements with card issuers.

If your expenses are paid directly by the company and do not require you to seek reimbursement and pay the bill yourself, there’s a good chance that you are not personally liable on the card. The only way you will know for certain is to consult your employer.

When you file bankruptcy, you have to list your corporate card in your bankruptcy paperwork if you have liability on it, and you will probably lose the use of that card because the card issuer will close the account. If you try to do an end-run around the card issuer, it probably won’t work. Credit card lenders scour bankruptcy filings by social security number on a daily basis to match up accounts.

So, how do you approach your employer about your soon-to-be-bankrupted corporate account? Here’s a game plan:

  • Do not ignore this. As hard as it may be to approach the company, it will go easier if they hear it from you first. Unless you work for a tiny company, this will probably not be the first time your company has dealt with the issue.
  • The employer may be willing to provide you with a company-issued card on which you are an authorized user, especially if you are not in the habit of using your company account for personal business.
  • The employer may be willing to set up a company debit card account for you or give you an advance.
  • In a worst-case scenario, you will have to use your own debit account and rely on reimbursement later. If the company owes you an expense reimbursement at the time you file your bankruptcy, that is an asset to you and has to be listed as an asset on your bankruptcy paperwork. If that asset is exempt, it will be protected from the reach of the court, and you can use the money to fund your business expense account. If it is not exempt, and the bankruptcy trustee wants to use it to pay creditors, you may be on your own. 

Updated by Carron Nicks May 2018