Bankruptcy and Discrimination

One of the many questions we get at Ronald D Weiss, P.C. is, “Can someone discriminate against me for filing bankruptcy?”. In this reading, let’s dive into the many types of discrimination filers have faced and their outcomes.

Federal law forbids private employers, government, and government agencies from discriminating against employees in debt. A bankruptcy filing may be discovered on a credit report or credit check, but they cannot discriminate against you because of it. Understanding employment discrimination is crucial for both employees and employers alike, as it can have serious legal and financial consequences.

In the context of bankruptcy filing, employment discrimination refers to the discriminatory treatment that an employee may face due to their involvement in bankruptcy proceedings. This can manifest in various ways, such as termination, demotion, reduced pay, denial of promotions or benefits, harassment, or hostile work environment. The consequences of employment discrimination during bankruptcy proceedings can be significant, impacting not only the employee’s financial stability and career prospects but also potentially leading to costly legal battles for employers.

The United States Constitution authorizes the federal government to establish bankruptcy laws and conduct bankruptcy proceedings. In 1971, federal laws against bankruptcy discrimination reached the forefront in Perez v. Campbell, 421 F.2d 619, 621 (9th Cir 1970). Perez argued that a state cannot deny a debtor a driver’s license because of an unpaid court judgment that had been discharged in his bankruptcy case. Perez prevailed in his case.

The ruling on this matter prompted Congress to codify Perez in the Bankruptcy Reform Act which lead to the enactment of 11 U.S.C § 525:

“(a) Except as provided in the Perishable Agricultural Commodities Act, 1930, the Packers and Stockyards Act, 1921, and section 1 of the Act entitled “An Act making appropriations for the Department of Agriculture for the fiscal year ending June 30, 1944, and for other purposes,” approved July 12, 1943, a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.”

The 1978 Bankruptcy Reform serves as the foundation of modern bankruptcy law. Section 525’s antidiscrimination principle applies only to actions of discrimination that are centered solely on the basis of bankruptcy. Congress then enacted § 525 (b) to extend the anti-discrimination principle to private employers. Prior to 1984, private employers could terminate a person solely on the basis of their bankruptcy filing. The language of § 525(b) almost mirrors that of § 525(a) with one substantial exception. Government employers in § 525(a) are prohibited from denying employment to or terminating the employment of a debtor. Whereas in § 525(b), it prohibits a private employer from terminating or discriminating against a debtor.

11 U.S.C. § 525(b) reads as follows:

(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt–
(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;
(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or
(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

The Bankruptcy Codes prohibition of discrimination against debtors by government agencies was envisioned to be read broadly to forbid discrimination in many different forms, as noted In re Patterson, Bkrtcy.N.D.Ala.1990, 125 B.R. 40 , later affirmed 967 F.2d 505. Chapter 13 debtors moved to restrain the employee credit union from closing the debtors’ accounts and for an award of costs, claiming that the credit union violated the automatic stay and unlawfully discriminated against the debtors. The Honorable Chief Judge Wright held that: (i) credit union, which placed an administrative freeze on the debtors’ accounts, did not have any right of setoff at the time it froze accounts, and such a freeze, which occurred before adjudication, was an impermissible “setoff,” and (ii) the freezing of the debtors’ accounts, denial of services to debtors, refusal of their deposits, and return of their checks violated the Bankruptcy Code’s prohibition of discrimination against the debtor with respect to employment.

Employers running credit checks have gained popularity over the years in the pre-employment screening process. Credit reports will show a bankruptcy filing within the past ten (10) years. Some argue the reason employers check the applicant’s credit history is to reduce theft, fraud, embezzlement, and criminal activity. Many believe this is not a fair assessment of a potential employee and does not give a fair representation of their integrity. Especially for those who have or are currently in a bankruptcy case seeking a “fresh start.” There have been several cases before the courts that have upheld the private employer’s right to refuse to hire based on a bankruptcy filing. In re Hardy, 209 B.R. 371, 374-79 (Bankr. E.D. Va 1997) it was determined that §525(b) employees are the only debtors qualified for the application. Those who have not been hired are not considered employees.

The absence of “deny employment to” in § 525(b) presents the question of whether or not a private employer can deny employment to a debtor because they have filed for bankruptcy. Three United States circuit Courts, two United States district courts, and two United States bankruptcy courts have held that § 525(b) is only applicable once an employer–employee relationship has been established. The majority view is that § 525(b) does not apply to hiring decisions. The United States District Court of the Southern District of New York held In Leary b. Warnaco, Inc. § 525(b) does apply to hiring decisions based on the “fresh start” promise of the Bankruptcy Code. While § 525(b) may not include “deny employment” language, it would be incomprehensible to read § 525(b) to allow private employers to refuse to hire debtors while prohibiting that same employer from discriminating against debtors who are already employees.

The word “bankruptcy” has such a negative stigma attached to it. Many believe that the primary reason that people file for bankruptcy is because of extravagant and reckless spending. This simply is not the case. Our firm has represented clients for more than 30 years, and they come from all walks of life. The majority of the clients we help have experienced job loss, medical issues, divorce, or loss of a spouse. All of these can send one’s financial situation into a downward spiral; however, none of these are shown on a credit report next to the word bankruptcy when a potential employer is checking it. Thus leading to an unfair assessment of the applicant.

The stereotypical view of a person who has filed for bankruptcy is that they are irresponsible and lack management skills; therefore, opportunities for advancement should be reserved for those with a pristine financial history. This is a direct contradiction of the “fresh start” for which the Bankruptcy Code was created. Employers should never deny employment or advancement in their company to someone who has filed for bankruptcy. Their personal worthiness is not predicated on the financial woes they’ve faced and are trying to overcome. It would do the employer good to investigate and get to know the applicant a bit better before making rash decisions and denying employment based on their preconceived notions connected to the word “bankruptcy.” Gainful employment is fundamental to obtaining financial stability after a financial setback.

It is irrational for a debtor who is otherwise qualified to perform the job to be denied employment. Their bankruptcy status should have no bearing on the employment or promotion of that debtor. This is the reason 11 USC § 525 was enacted to prohibit discrimination and secure the promise of a “fresh start” for all those who file for bankruptcy.

Discrimination is not just limited to the employer-employee relationship; it extends to governmental licensing and employment as well. In the Southern District of Florida In re Adler, 47 B.R. 554 (Bankr. S.D. Fla. 1985), Bankruptcy Judge Thomas C. Britton held that §525(a) prohibits the enforcement of the statute that permits the state Department of Motor Vehicles to suspend licenses and registrations of judgment debtors, even if judgments against them were discharged in bankruptcy; ability to engage in a trade or business.

In an appeal in the United States District Court for the District of Utah, Judges Logan, Moore, and Baldock found a statute that automatically rescinds the real estate license of any licensee for whom payment was made from a real estate recovery fund, is in breach of §525(a) In re Walker, 927 F.2d 1138 (10th Cir. 1991).

On April 7, 1980, In re Heath, 3 B.R. 351 (N.D. Ill. 1980) , the Honorable Judge Robert L. Eisen held that a state university’s refusal to supply the student Calvin Heath’s transcript until he, the debtor, paid the prepetition debt in full violated §525(a).

The Second Circuit, in an appeal from the United States Bankruptcy Court for the District of Vermont, decided on December 20, 2002, that a person’s continued right to rent public housing constituted a governmental license, which could not be repudiated by reason of §525(a) In Stoltz v. Brattleboro Housing Authority (In re Stoltz),310 F.3d 80 (2d Cir. 2002).

In conclusion, §525(a) provides significant limitations on the government’s ability to deny employment or licensing rights to a debtor who has filed a bankruptcy case or obtained a bankruptcy discharge. These restrictions are an appropriate exercise of federal jurisdiction. Under 11 USC § 525, it does protect you from being fired whether you are employed by a government agency or a private employer and the potential application of a governmental unit. However, in the private sector, § 525(b) of the Bankruptcy Code has a constrained influence. A debtor may not suffer discrimination on the job, but it does not prevent a private employer from denying you employment solely because of the bankruptcy filing.