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Bankruptcy and Employment Discrimination

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Often I have people come to me contemplating a bankruptcy who are worried that their employers will terminate them if they file. This is especially common for people who work for banks and credit card companies. After all, if you work for Bank of America as a loan officer and file Bankruptcy to discharge debts owed to Bank of America on credit cards or home loans, it would only be fair for Bank of America to terminate your employment, right? Wrong. The Bankruptcy Code contemplates this predicament and, as a result, includes provisions specifically prohibiting discrimination in employment based on an employee’s filing a bankruptcy.

The scope of protection varies depending on whether the employer is a government unit or a private employer. Section 525(a) applies to government employers and states in relevant part that 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….” 11 U.S.C. § 525(a). Notably, this section prohibits both discrimination in hiring and discrimination with respect to existing employment.

Private employers, however, are not prohibited from discriminating in hiring. Section 525(b) provides that “[n]o 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…solely because such debtor or bankrupt…” filed for bankruptcy protection. See 11 U.S.C. § 525(b). In a recent 3rd Circuit opinion, Rea v. Federated Investors, a Circuit Court held that Congress made its intent clear by the plain language of the statute. Government employers cannot discriminate in hiring but private employers may choose not to hire someone because they have filed for bankruptcy protection. In Rea, the appellant Dean Rea brought suit against Federated Investors after he had interview for a job through a placement agency. He was later informed that he was not hired because of a prior bankruptcy filing. Rea sued under Section 525(b) claiming that the statute should be read broadly to prohibit private employers from discriminating in hiring. Both the District Court and Appellate Court disagreed, holding that only government employers were prohibited by Section 525(a) from discriminating in hiring.

Therefore, while neither the government nor a private employer may discriminate with respect to employment because an employee has filed bankruptcy, a private employer may refuse to hire someone based on a prior bankruptcy filing. This is a valid concern for anyone contemplating a bankruptcy. That being said, employers also routinely discriminate based on poor credit scores and foreclosures, both of which are indicators common to many individuals contemplating bankruptcy. Moreover, there is little protection from such discrimination based on credit information and foreclosures in the law. Thinking of it another way, if you are in debt or facing foreclosure and do not file Bankruptcy, you are leaving the door open for discriminatory action by your employer based on these factors. If, rather, you file for Bankruptcy protection when faced with defaulting debt and possible foreclosure, the Bankruptcy Code provides some measure of protection from employment discrimination thereafter. In other words, even if the employer’s sole reason for terminating employment post-Bankruptcy is a credit check, you have an argument that their action was based on the Bankruptcy and might obtain some relief (or more likely prevent your employer from taking an adverse action in the first place).

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Hamid Jabbar

Hamid Jabbar

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