Can Filing Bankruptcy Affect Your Job?

Filing for bankruptcy provides a way to manage overwhelming debt and achieve a financial fresh start. Many people considering this option worry about its potential effects on their employment, fearing job loss or discrimination. While it is a significant financial step, filing for bankruptcy does not result in termination or negative employment consequences. Legal protections ensure that seeking financial relief does not unduly jeopardize their livelihood. This article explores how bankruptcy affects employment, detailing protections and specific impacts.

Employment Protections and Employer Awareness

Federal law protects against employment discrimination due to bankruptcy. The Bankruptcy Code, Section 525, prohibits governmental units from denying, terminating, or discriminating in employment against a person solely because they have filed for bankruptcy. This protection extends to state and local government employers, ensuring a bankruptcy filing alone cannot be the basis for adverse action in public sector jobs.

For private employers, Section 525 of the Bankruptcy Code states they cannot terminate or discriminate in employment against an individual solely due to bankruptcy. This section does not explicitly prohibit private employers from making hiring decisions based on a bankruptcy filing, which differs from governmental employment protections. Some courts have interpreted this distinction to mean private employers may consider a past bankruptcy when evaluating job applicants, particularly if the financial history is relevant to the job duties.

Employers may become aware of a bankruptcy filing through several avenues. Bankruptcy filings are public records. An employer conducting a comprehensive background check, especially one including a credit history, might discover a bankruptcy filing. A bankruptcy will not appear on a criminal background check because it is a civil, not a criminal, matter.

Not all employers routinely conduct credit checks; these are performed with applicant consent. Credit checks are for roles involving financial responsibilities, access to money, or sensitive financial information. Even if a bankruptcy appears, it is not always an automatic disqualifier. Many employers recognize that bankruptcy can stem from various circumstances, such as medical expenses or job loss, rather than solely from financial irresponsibility. For most standard positions, a bankruptcy filing rarely impacts current employment, and federal laws prevent discrimination based on this financial event.

Impact on Specific Professions and Licenses

While general employment is largely protected, certain professions and licensed occupations may experience a more nuanced impact from a bankruptcy filing. Professions involving financial trust, handling significant sums of money, or maintaining security clearances have specific regulatory requirements or professional standards. These include roles in financial services, such as banking or investment advisory, and licensed fields like real estate, law, medicine, or government positions requiring security clearances.

Professional licensing boards or regulatory bodies may review the circumstances surrounding a bankruptcy filing. While bankruptcy itself is not a direct cause for license revocation, the underlying reasons for the financial distress can be scrutinized. If the bankruptcy resulted from fraud, embezzlement, or severe financial mismanagement indicating a lack of trustworthiness, a licensing board might initiate a review. The concern is about the individual’s conduct and integrity, rather than merely the act of filing for bankruptcy.

Many professional licenses require licensees to report a bankruptcy filing to their respective boards. Failing to disclose a bankruptcy when required could lead to disciplinary actions, including suspension or revocation of the license, as it might be viewed as a failure to comply with professional obligations. It is important for licensed professionals to understand their specific reporting requirements and communicate openly with their licensing bodies. Proactively demonstrating responsible financial behavior and providing context for the bankruptcy can mitigate concerns.

For individuals holding security clearances, a bankruptcy filing does not lead to an automatic loss or denial of the clearance. In many instances, filing for bankruptcy can be viewed positively, as it indicates a proactive step to resolve financial problems, which can reduce vulnerability to financial coercion. Security clearance decisions focus on an individual’s overall financial stability, trustworthiness, and the reasons behind financial difficulties. Demonstrating a commitment to resolving debt, rather than ignoring it, can reflect favorably on an individual’s reliability.

Future Employment and Background Checks

A bankruptcy filing can appear on background checks for future employment, as these filings are public record. The duration a bankruptcy remains visible on a credit report depends on the type of bankruptcy filed. A Chapter 7 bankruptcy stays on a credit report for up to 10 years from the filing date. A Chapter 13 bankruptcy, which involves a repayment plan, remains on a credit report for up to seven years from the filing date.

When a potential employer conducts a background check that includes a credit report, the bankruptcy will be visible. Federal regulations, such as the Fair Credit Reporting Act (FCRA), govern how consumer reporting agencies can report this information and how employers can use it. The FCRA limits how long certain negative information, including bankruptcies, can be reported, aligning with the 7-to-10-year periods.

Many employers understand that bankruptcy can arise from unforeseen circumstances like medical debt, job loss, or divorce, rather than solely from irresponsible financial habits. The presence of a bankruptcy on a background check does not always lead to an adverse hiring decision. For job applicants, honesty and transparency are advisable if a bankruptcy is likely to appear on a background check.

Being prepared to discuss the bankruptcy in an interview or application process, explaining the circumstances that led to it, and highlighting steps taken toward financial recovery can be beneficial. Demonstrating that the bankruptcy was a responsible action to regain financial stability, rather than an avoidance of obligations, can shape an employer’s perception. The focus shifts from the bankruptcy itself to how an individual has managed and overcome financial challenges.