Will I Lose My Job if I File for Bankruptcy?

It’s common for people considering bankruptcy to be concerned about the impact a bankruptcy filing may have on other areas of their lives. Some of the most common concerns include the impact of bankruptcy on access to credit, how bankruptcy will affect existing property such as homes and cars, and the possibility of job loss.

It’s not surprising that people already struggling with debt would be concerned about loss of income. However, for most bankruptcy petitioners, neither the bankruptcy filing nor the bankruptcy discharge is likely to affect employment. In part, that’s because federal law protects most workers from being discharged because of a bankruptcy filing. In part, it’s because many employers never even know that an employee filed for bankruptcy protection. And, many won’t care, or may even see the bankruptcy filing as a step in the right direction.

Will My Employer Know if I File Bankruptcy?

Although bankruptcy is a matter of public record, that doesn’t necessarily make the information as public as you may fear. Very few people (or corporations) devote time to monitoring the bankruptcy docket to see who filed recently. So, although the information may be available through the court’s website or the clerk’s office, that doesn’t mean it’s likely that anyone you know–let alone work with–will see it.

There are some circumstances in which an employer might become aware of a bankruptcy filing, including pure chance. There are even some limited circumstances under which the employer will receive notice of the bankruptcy. The most common of these is when a creditor or debt collector is already garnishing your wages. The automatic stay in bankruptcy is a court order stopping collection activity, including wage garnishment. So, your employer will receive notice to stop the garnishment withholding.

Of course, the fact that your employer knows about your bankruptcy doesn’t necessarily mean the company will want to terminate you. If you’re doing a good job, chances are good that your performance will outweigh any negative impression the employer might have based on your bankruptcy filing. In most jobs, your personal finances aren’t especially relevant to your job performance–except, of course, when you’re distracted by financial stress or being interrupted by collection calls at work. In those circumstances, bankruptcy may be viewed as a positive: with the financial stress removed, you’ll be more focused, and your phone will stop ringing.

Similarly, if your wages are being garnished, your employer already knows you’re having financial difficulties. And, those difficulties are creating extra work for your payroll department. Thus, your employer may be happy to see the garnishment resolved. 

If your employer takes a different view and wants to terminate your employment, the company may find its options quite limited. Section 525 of the U.S. Bankruptcy Code provides protection for employees of both governmental entities and private companies who file bankruptcy.

Differing Protections for Governmental and Non-Governmental Employees

Although bankruptcy law protects both private and governmental workers from bankruptcy-based termination, the specifics are a bit different, and the protections for these two groups are not identical.

A governmental employer is prohibited from denying employment to, terminating the employment of, or discriminating with respect to employment against someone solely on the basis of certain bankruptcy-related activities. These include:

• Being or having been a debtor under the U.S. Bankruptcy Code,
• Being associated with a person who is bankrupt or has been a debtor under the U.S. Bankruptcy Code,
• Having been insolvent before the commencement of a case, or during the case, or
• Not having paid a debt that is dischargeable in the case

Although the language varies slightly, the protections for an employee of a private company are similar with regard to termination of employment. The most significant difference is that the statutory provision limiting private employers prohibits termination of employment and discrimination with respect to employment, but does not specifically include the “deny employment to” language associated with government employers.

Because Congress explicitly included that language with regard to government employers and not private employers, some courts have rules that “discriminate with respect to employment” clause does not extend to the hiring decision.

In California, many job applicants have an additional layer of protection against employers discovering and discriminating on the basis of a bankruptcy filing: with limited exceptions, California law prohibits employers from using credit reports in the employee screening process. The exceptions include managerial positions, positions with law enforcement agencies, and roles providing access to certain types of confidential information. 

What Happens if I Get Fired for Filing Bankruptcy?

In the unlikely event that your employer finds out that you filed bankruptcy and decides to fire you because of it, you may be able to sue your employer for wrongful termination. Whether you have a wrongful termination claim and your potential damages will depend on the specifics of your situation. If you are concerned about losing your job because you filed bankruptcy, raise this issue in your initial consultation with your bankruptcy attorney. Your attorney can advise you on any factors that might make you vulnerable to termination, and can tell you how best to protect yourself as you move forward. If you don’t yet have an attorney, get in touch with one of our experienced bankruptcy attorneys for a free consultation.