Bankruptcy and Employment

Section 525 -- Anti-Discrimination Protection

Section 525 of the Bankruptcy Code prohibits certain forms of discrimination based on bankruptcy. It has two subsections with different protections:

Section 525(a) -- Government employers

A governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant; and may not deny employment to, terminate the employment of, or discriminate with respect to employment against a person solely because that person has filed bankruptcy or failed to pay a discharged debt.

Section 525(b) -- Private employers

A private employer may not terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under the Bankruptcy Code solely because of the bankruptcy. However, there is a critical gap: Section 525(b) does not explicitly prohibit private employers from refusing to hire based on bankruptcy.

Background Checks

Bankruptcy is a public record. Employers who run background checks may discover it. However:

• Under the Fair Credit Reporting Act (FCRA), employers must get your written permission before pulling a credit report
• If adverse action is taken based on the report, the employer must notify you and give you a copy
• Some states and cities have banned or restricted credit checks in hiring (check your local laws)

Security Clearances

A common fear is that bankruptcy will cost you a security clearance. The reality:

• Filing bankruptcy does NOT automatically disqualify you from holding a security clearance
• Adjudicators consider the "whole person" -- bankruptcy can actually be viewed positively as responsible debt management compared to ignoring debts
• Unresolved debt is MORE of a security concern than bankruptcy, because it creates vulnerability to financial coercion
• You must disclose the bankruptcy on your SF-86 form

Professional Licenses

Section 525(a) protects against government denial of professional licenses based on bankruptcy. This covers:

• Medical licenses
• Law licenses (bar admission)
• CPA licenses
• Teaching certificates
• Real estate licenses
• Commercial driver's licenses

A licensing board cannot deny or revoke your license solely because you filed bankruptcy. However, if the underlying conduct that led to bankruptcy also violated professional standards (fraud, misappropriation of client funds), the board can act on that conduct.