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Short answer - perhaps.

These days, background checks are easy to perform electronically and you can research your candidate’s criminal, educational, work, address, marital, and yes, credit and financial history online. Because the consequences of a bad hire are numerous - decreased productivity, loss of training costs, lower employee morale, among others - it is essential to do a bit of research to avoid a bad hire.

As an HR professional, you’ve created your shortlist of certain things that strike candidates from consideration automatically. Should the filing of a personal bankruptcy case be on that list?

Why Do People File Bankruptcy?

Those of us who have never struggled financially often have little sympathy for those who have had to file bankruptcy. But consider why most people must file bankruptcy. Statistics show that year after year, divorce, job loss, and medical catastrophe are the top three reasons individuals are forced to file bankruptcy. Congress enacted the Bankruptcy Code to provide these “honest but unfortunate” debtors to recover from these events financially and get a fresh start. 

That being said, there certainly are those people who use credit unwisely and find themselves in over their heads, with no recourse but to file bankruptcy. And, in recent years when property values dropped precipitously, many homeowners found themselves underwater having taken out second and perhaps third mortgages. Bankruptcy is a way for those homeowners to “strip off” those liens in excess of the property’s market value and discharge them as unsecured debt.

In the case of lien-stripping, you can ask the candidate whether he or she used the second or third mortgages or a HELOC to fund home improvements, or pay off credit cards or take an extended vacation. Won’t the answer say something about the candidate’s character?

Depending upon the type of position you seek to fill, you need to find out the reason or reasons your candidate filed a bankruptcy petition. The petition itself is a matter of public record and if you or a member of your staff have access to PACER, the online filing system for the federal courts, you can find out for yourself. 

What to Look for in a Bankruptcy Filing

If you are hiring for a position that requires a fiduciary responsibility, accounting and budgeting skills, or security clearances, it is important to know what to look for in a bankruptcy petition.

1.   Examine the Docket

The docket is the landing page of the bankruptcy case you searched for.  It will contain links to pdfs of the documents filed with the court and show all of the actions taken by the parties involved with the case.

The docket will show the case number, the date of filing and judge and Trustee assigned to the case, where it was filed, all of the candidate’s personal information, such as full name, address and contact information, and attorney information if the candidate filed with the help of an attorney.

When was the case filed?

Consider, how long ago was this case filed? Was the case successfully concluded with a discharge? If filed over ten years ago, discharged, and no other red flags are present, you might conclude that the candidate learned from the bankruptcy how to better manage finances, or, if the candidate filed because of divorce, job loss, or medical catastrophe, he or she has recovered financially from that. Would the bankruptcy then still be a factor for you in deciding whether to hire him or her?

Were there any Objections or Motions?

Scan down the list of actions and filings on the docket.  Look for any Objections or Motions for Relief from the Automatic Stay. This will indicate that the Trustee or a creditor took action against the debtor. While these in and of themselves should not be alarming, as they are common, it is worth looking into the nature of the Objection or Motion. 

For example, whether the Trustee objected to discharge because the debtor failed to disclose a bank account, or an auto lender objected to the proposed Chapter 13 repayment plan because the debtor proposed to “cram down” the creditor’s claim to the present retail value of the vehicle, means two entirely different things.

In the first case, the debtor was dishonest and may face federal criminal charges for abusing the bankruptcy process. In the second case, the debtor may have filed an aggressively low retail value of the vehicle, which is common, and the creditor wants to be paid a bit more. These situations are often resolved through negotiation.

2.   Scan Through the Petition and Schedules

The petition and schedules are an opportunity for you to find out if what information the candidate has given to you comports with what the candidate disclosed to the bankruptcy court. Everything about a candidate’s financial situation will be disclosed - assets, debts, income, and expenses. These will tell you a lot about a candidate.

Those Who File Bankruptcy Receive Financial Education

As part of revisions to the bankruptcy code in 2005, all debtors must take a pre-filing financial education course and a post-filing financial education course. These are intended to help debtors avoid the situations that forced them to file bankruptcy.

If your candidate used credit unwisely, but then learned how to budget and live within his or her means from these courses, would that affect your opinion of the candidate?

What to Ask the Candidate about the Bankruptcy

While you may be satisfied after looking at the docket and petition and schedules, it is worth interviewing the candidate and hearing in his or her own words why filing bankruptcy was necessary, and how the candidate has moved on after the case closed. Be kind - it is likely that bankruptcy took an emotional toll on the candidate. The upshot of asking is that you will also learn how the candidate responds under pressure and discomfort.

Some sample questions:

  1. What debt situation caused you to file?
  2. Did you accomplish what you needed to accomplish with the filing?
  3. How have you moved on from your fresh start after you received your discharge?

Bankruptcy is a grey area for most HR professionals, and in today’s market where attracting and retaining qualified employees is more challenging than ever, it is worthwhile to look behind the mere fact of the filing and into the reasons for filing. Think of it as an opportunity to learn even more about your candidate - in any case, you will be glad that you did.

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Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy bankruptcy lawyer in Abington, PA.

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