Will Bankruptcy Affect My Job or Future Employment?

If you plan to file for bankruptcy, you might be worried about the effect it could have on your employment. For instance, many people wonder:

• Will an employer find out about a Chapter 7 or Chapter 13 bankruptcy?
• Can an employer fire an employee who has filed for bankruptcy?
• Is it legal to pass over a job applicant due to a bankruptcy filing?

Although your employer might learn about your bankruptcy case, rest assured that in most situations your bankruptcy won't affect your current employment. However, it might prevent you from getting a job in private industry later.

Will You Lose Your Job Due to Bankruptcy?

No employer—government or private—can fire you solely because you filed for bankruptcy. Nor can an employer use a bankruptcy filing as a reason to change other terms or conditions of your employment. For instance, your employer can’t:

• reduce your salary
• demote you, or
• take away responsibilities.

However, if the employer has other valid reasons for taking these actions, such as tardiness, dishonesty, or incompetence, the fact that you filed for bankruptcy won’t protect you.

But if you’re fired shortly after your employer learns of your bankruptcy—and no other justifications exist—you might have a case against the employer for illegal discrimination.

How Employers Find Out About Bankruptcy

Employers rarely find out about a Chapter 7 bankruptcy filing. But it can happen. Here’s how.

• Stopping a wage garnishment. If you have a wage garnishment and you file for bankruptcy, your employer will find out. Your employer must receive notice of the bankruptcy to stop the garnishment (you or your attorney will notify the employer). But, since your employer (or at least the payroll department) already knew you were under financial stress, it’s likely they’ll welcome the bankruptcy as a way for you to take affirmative steps to put your problems behind you.
• Making Chapter 13 payments. In some, but not all jurisdictions, if you file for Chapter 13 bankruptcy, your employer is likely to learn of your bankruptcy case. The bankruptcy judge might order your Chapter 13 payments to be automatically deducted from your wages and sent to the bankruptcy court. In effect, your employer will be pressed into service as a sort of collection agency, to make sure you honor your Chapter 13 plan.
• You owe your employer money. When you fill out your bankruptcy paperwork, you must list all of your debts. For instance, if you’re paying back a payroll overpayment, you’ll have to include it, and your employer will get notice of your bankruptcy case.

Security Clearances, Bankruptcy, and Employment

Many jobs require a security clearance. If you’re a member of the armed forces or an employee of the CIA, FBI, another government agency, or a private company that contracts with the government, you might have a security clearance.

Do you risk losing your security clearance if you file for bankruptcy?

Probably not—and the opposite might be true. According to credit counselors for the military and the CIA, a person with financial problems—particularly someone with a lot of debt—is at high risk of being blackmailed. By filing for bankruptcy and getting rid of the debts, you substantially lower that risk. Bankruptcy usually works more in your favor than to your detriment.

Effect of Bankruptcy on Job Applicants

No federal, state, or local government agency can consider your bankruptcy when deciding whether to hire you. Private employers, however, aren’t constrained by a similar rule, and some people find that having a bankruptcy in their past comes back to haunt them.

Many private employers conduct a credit check on job applicants. The employer will find out about your bankruptcy from the credit report. A bankruptcy filing causes problems mainly for those applying for jobs that require them to deal with money, such as bookkeeping, accounting, payroll, and so on.

While an employer needs your permission to run a credit check, employers can also refuse to hire you if you don’t consent. If you’re asked to give this authorization, consider speaking candidly about what the employer will find in your file. Being honest and upfront might outweigh the negative effects of the bankruptcy filing.

Learn about other things to consider before filing in Bankruptcy: Should I File?