Are you facing bankruptcy? A common fear among those who face bankruptcy is the possibility that it will hinder their ability to find a job. What does bankruptcy do to a job search? Do you need to worry? There isn’t exactly a cut-and-dry answer to this question, but there are several important facts worth knowing. Let’s talk about the relationship between bankruptcy and employment.

Financial Discrimination

By law, your employer cannot discriminate against you due to bankruptcy. If your employer learns that you are going through bankruptcy, they cannot fire you, demote you, or otherwise change your compensation because of it. This is against the law, and if it happens you should contact an Athens attorney. Some employers might look for other reasons to fire a bankrupt employee – tardiness, workplace behaviour and so on. Firing someone for these reasons is not against the law, so these situations can quickly become legal quagmires if the employer is being unpleasant.

You should know that the discrimination laws pertain to your current employer. This has nothing to do with looking for employment and does not affect the actions of potential employers. You can’t depend on it for protection on the job search.

Private Employers

A private employer is any hiring company or business that is not part of the government (there are other parts to that definition, but this is the important part). The average restaurant down the street or corporate office downtown is a private employer, no matter how big or small. These private employers can indeed make decisions about whether or not to hire you based on bankruptcy. … if they know about it. Some employers will run basic background and financial checks, or outright ask people if they have had a bankruptcy. Bankruptcies stay on your financial record for up to 10 years.

If it comes down to a choice between someone with bankruptcy in the past and someone without one, many employers prefer to choose someone without bankruptcy. Some businesses may not care, and some may consider the time that has passed. However, it is not illegal for companies to make decisions this way.

Government Jobs

Public employers – those offering government jobs – are an entirely different story. These employers are bound by federal law to discount past bankruptcies when hiring employees. Not only does it not matter to public employers, it can’t matter. It’s part of a government effort to avoid any sort of discrimination. If you went through bankruptcy and are struggling to find a job, consider turning toward public employment: Your chances may be better in this market.

Security Clearances

Some jobs have security clearances for dealing with sensitive materials, armed forces, legal matters, kids and many other things where an extra “filter” is needed when hiring. Generally speaking, it may be more difficult for a person with a recent bankruptcy to apply for a job involving a security clearance. Keep this in mind when applying for jobs. On the plus side, the government may actually prefer giving security clearance to someone coming out of bankruptcy because they are less likely to be a security risk via overwhelming debt.

Ambiguous Answers

A study conducted by Paul Goldsmith-Pinkham, an assistant professor of finance at Yale, and his collaborators found that existing research into the potential detrimental impact of bankruptcy on a job search didn’t give a definitive “yes” or “no” as to whether bankruptcy makes finding a job harder. He did see that bankruptcy adversely affected job prospects in Sweden. However, the socioeconomic structure of the US differs from that of Sweden, which must be considered.

After the US suffered a financial crisis in 2008, more than 1.5 million Americans declared bankruptcy after real estate market crashes and lengthy unemployment. Bankruptcy immediately affects creditworthiness and the ability to obtain a loan. It also can greatly impact the person’s ability to secure housing through renting. Knowing that bankruptcy impacts multiple areas of life, it is only natural to wonder how it can affect a job search.

Goldsmith-Pinkham first became interested in the impact of bankruptcy on American job searches when he worked at the Federal Reserve Bank of New York. Many people believed they were losing job opportunities due to filing for bankruptcy, but there wasn’t clear evidence to support those beliefs at that time. The link between credit and jobs must first be understood to understand how bankruptcy can affect a job search.

To make the connection between credit and the job market, you would have to determine how someone’s career path was altered by filing bankruptcy. That connection would require what-if thinking and theories and suppositions. However, Goldsmith-Pinkham and his associates determined a way to analyze these effects using real-world data.

In the US, debtors can file for either Chapter 7 bankruptcy or Chapter 13 bankruptcy. The two differ in how debts are handled, but they also differ in how long the bankruptcy “flag” remains on your credit report. With Chapter 7 bankruptcy, assets are liquidated to pay off debts, but the after-effects stay on the credit report for 10 years. Chapter 13, on the other hand, allows debtors to pay debts back through a court-approved payment plan, and the flag can be removed from credit reports after seven years.

That leaves a three-year window between the removal of bankruptcy flags for one group and the bankruptcy flag for another group. That window gave researchers data to rely on for their study. During those three years, when one group still had a bankruptcy on their credit report, and the other group didn’t the researchers on the Goldsmith-Pinkham team tracked credit and labour statistics for both groups.

The study used Equifax Consumer Credit Panel data and a database that merges bankruptcy records with Social Security Administration tax records. Those databases gave the team access to information on bankruptcy discharges. One finding was that those who had filed Chapter 13 and had the bankruptcy flag removed had higher instances of having mortgages, obtaining new credit, and greater credit card limits than those who still had Chapter 7 on their credit report.

This study didn’t see a large difference in the employment prospects between the two groups. The team looked at data for those seeking employment and those retaining work. The study’s implications are that job seekers can relax somewhat regarding their bankruptcy status because it doesn’t seem to play a significant role in determining job eligibility.

Additionally, the methodology used with this study gives policymakers a potential method for assessing instances of discrimination in workplace hiring practices. Using the comparison of databases gave the researchers insight into a technique that could potentially identify hidden biases within the hiring process.

Will Employers Know If Someone Filed Bankruptcy?

The answer to whether your employer will learn that you filed for bankruptcy is maybe. It’s dependent on a couple of things.

1. Do you owe your employer money? If so, they will be listed as a creditor on your bankruptcy filing and will be notified you filed.
2. Do you have any current garnishments? If so, your employer will receive a notice telling them to stop withholding the garnished funds for the creditor.

If neither of these situations applies to you, it’s unlikely that your employer will know about your bankruptcy filing. Of course, you may also choose to tell your employer, particularly if you must appear in bankruptcy court during a scheduled shift. Just remember, filing bankruptcy is not just cause for an employer to fire you.

Will Potential Employers Know About a Bankruptcy Filing?

Unless you tell them or they run a credit check on potential employees, it’s unlikely that a new employer will learn of your bankruptcy filing. Most employers don’t care about your finances if you can complete assigned tasks. Despite popular belief, some employers don’t even check credit reports. Additionally, some states have laws limiting how much credit reports can play into hiring decisions.

As we mentioned earlier, private-sector employers have more leeway when using credit report information against you during the hiring process. In some cases, employers will use things like security clearance or past job history to avoid hiring someone with a bankruptcy in their financial history. However, many employers don’t consider bankruptcy when hiring, and most don’t include the topic in their hiring process.

If you have more questions about life after bankruptcy, contact Morgan & Morgan today. We can help you find your way.

Related Content: What happens when you file chapter 7 bankruptcy

Original article revised on Jan 13, 2023