Can I Lose My Job If I File for Bankruptcy?

Your employer cannot legally fire you just because you filed for bankruptcy. The law prohibits government and private employers from terminating your job due to a bankruptcy filing. However, the protection is not so broad when applying for a new job.

Prohibition Against Job Termination

Under the law, no employer, government or private, can terminate your employment solely because you have filed for bankruptcy, you were insolvent before you received a discharge in bankruptcy, or you didn't pay a debt eliminated or "discharged" in bankruptcy, or that will be discharged in a pending bankruptcy. (11 U.S.C. § 525.)

Your non-filing spouse’s job is also protected. The law extends the prohibition to people associated with someone who has filed for bankruptcy.

Employer Motivation Matters

The prohibited action must be solely based on the bankruptcy filing. The bankruptcy laws will not prevent you from being fired for other reasons. They also won't prevent you from being laid off or terminated if your company is downsizing or reducing its workforce in an otherwise legally acceptable manner. Of course, choosing you for termination just because you filed for bankruptcy would be prohibited.

Protection Extends to Discriminatory Actions

The law also prohibits discrimination concerning your employment or anyone associated with you because of your bankruptcy. While this doesn't necessarily cover hiring decisions, it does mean that if you are already employed, you can’t be treated differently just because you filed for bankruptcy. For example, it would be a legal violation to do the following:

• deny a promotion or a raise because you filed for bankruptcy, or
• demote you, or reduce your salary because of the bankruptcy filing.

It doesn’t matter if you work for a government agency or a private company. The law applies to both.

Protection Limited When Seeking New Employment

The bankruptcy laws also provide protection for bankruptcy filers when being considered for new employment, but they don't apply to all employers.

Government Employers Can't Refuse to Hire You

Like the prohibitions against termination and discrimination, a government employer cannot refuse to hire you, or any person associated with you, solely because you have filed for bankruptcy, you had been insolvent before receiving a discharge in bankruptcy, or you have not paid a debt that is dischargeable in your bankruptcy or has been discharged in bankruptcy.

Private Employers Can Refuse to Hire You

Private employers can deny you employment based on your bankruptcy filing. Many private employers require credit or background checks before hiring, and your bankruptcy would likely appear in these reports. A private employer can refuse to hire you because you have filed for bankruptcy, even if that is the only reason for the refusal.

Also, you might not be protected during an employment evaluation period. At least one appellate court has permitted a private employer to deny employment after a two-day paid evaluation period solely because it found that the employee had previously filed for bankruptcy. In that case, the bankruptcy was discovered inrough a background check authorized by the prospective employee.

No Bankruptcy Discrimination in Government-Issued Licenses

Under the law, no governmental unit may deny, revoke, suspend, or refuse to renew a license because someone:

• filed for bankruptcy
• was insolvent before the bankruptcy discharge, or
• hasn't paid a debt that has been discharged or will be discharged in a pending bankruptcy.

Similar to the protection for employment actions, licensing protection extends to people associated with someone who has filed for bankruptcy. However, a few limited exceptions exist for the agriculture industry.

How Employers Find Out About Bankruptcy

As a practical matter, in most instances, your current employer won't find out that you have filed for bankruptcy unless you owe your employer money and must list your employer as a creditor in the bankruptcy paperwork or your Chapter 13 plan payments are required to be deducted from your paycheck and paid directly to the Chapter 13 trustee.

Not all districts require income deduction orders. Those districts that do might waive the requirement if you’re concerned that involving your employer would result in adverse employment actions.

Enforcement and Damages

If an employer violates bankruptcy discrimination laws and won't reconsider after learning of them, you can sue in court. The remedies vary when you win but could include job reinstatement and receiving back pay. In certain instances, you might be entitled to attorney fees. For more information, consider consulting a bankruptcy lawyer.