If you plan to file for bankruptcy, you might be worried about the effect it might have on your job. Will your employer find out about your Chapter 7 or Chapter 13 bankruptcy? Can you be fired because of the bankruptcy? And what if you are applying for a job—can a potential employer deny you a job because you filed for bankruptcy?
Although in some cases your employer will find out about your bankruptcy filing, rest assured that in most situations your bankruptcy won't affect your current employment. However, it might come into play if you later apply for a job in private industry.
(To learn about other types of post-bankruptcy discrimination, see Post-Bankruptcy Discrimination: Is it Legal?)
No employer—government or private—can fire you solely because you filed for bankruptcy. Nor can an employer use a bankruptcy filing as cause to change other terms or conditions of your employment, such as by reducing your salary, demoting you, or taking 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 are fired shortly after your bankruptcy is brought to your employer’s attention, and no other justifications exist, you might have a case against the employer for illegal bankruptcy discrimination.
In practice, employers rarely find out about a Chapter 7 bankruptcy filing. However, if a creditor has sued you, obtained a judgment, and started garnishing your wages, your employer will get the news, because to stop the garnishment, your employer must know about the bankruptcy (you or your attorney will notify the employer). However, 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.
In some, but not all jurisdictions, if you file for Chapter 13 bankruptcy, your employer is likely to learn of your bankruptcy case. If you have a regular job with regular income, the bankruptcy judge may order your Chapter 13 payments to be automatically deducted from your wages and sent to the bankruptcy court. (This is called an “income deduction order.”) In effect, your employer will be pressed into service as a sort of collection agency, to make sure you honor your Chapter 13 plan.
Many jobs require a security clearance. If you are 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—in fact, 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 for 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.
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—mainly when applying for jobs that require them to deal with money (bookkeeping, accounting, payroll, and so on).
Many private employers conduct a credit check on job applicants as a matter of course and will find out about your bankruptcy from the credit report. While employers need 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 upfront about problems that are behind you might outweigh negative effects of the bankruptcy filing itself.
(To learn about other things you should consider before you file for bankruptcy, see Should I File for Bankruptcy?)