Every year, millions of Americans face financial hardship, as they find themselves having to deal with economic arrears and spiraling debt. The authority to enact bankruptcy laws is vested in Congress by virtue of the U.S. Constitution, making this a primarily federal matter. Bankruptcy proceedings are handled in federal courts under rules outlined in the U.S. Bankruptcy Code [1]. The very philosophy behind the notion of bankruptcy is to offer consumers with multiple debts the opportunity to make a new start, while at the same time providing suitable distribution of their estate to their creditors.

One of the many concerns you may have if you are considering filing for bankruptcy or, indeed, if you have already filed a petition under Chapter 7 or Chapter 13, is how this affects your career prospects—either in the context of your current employment or if you are looking for a job. Worrying about discrimination in the context of your employment on the basis of bankruptcy is obviously a serious concern, and it is always helpful to be accurately informed about such matters.

The legal answer to this is a clear “no.” Specific provisions to this effect have been added to the Bankruptcy Code and federal law forbids the government, government agencies, as well as private employers from discriminating against people in debt.

We, at Roemerman Law, are fully aware of the fact that contemplating personal bankruptcy is a stressful and demanding process. Having the professional guidance of a bankruptcy attorney, particularly bearing in mind the complexity of this area of law, can be invaluable in terms of making the decision to move forward, but also with respect to having professional support throughout the process.

Bankruptcy Discrimination Laws

11 U.S.C. section 525 is the section of the Bankruptcy Code that prohibits public and private employers from discriminating against employees based on bankruptcy [2]. It was put in place by Congress in 1971 following the judgment of the Supreme Court in the case of Perez v. Campbell [3]. The case concerned an Arizona law that allowed the state to suspend a driver’s license because of unpaid court judgments that had been discharged in bankruptcy. The court found that such discrimination based on bankruptcy would frustrate the purpose of the bankruptcy law itself and deemed it unconstitutional due to its conflict with the federal Bankruptcy Act.

The relevant provisions of the Bankruptcy Code specify that a person can qualify for protection under section 525 in three ways:

If the person is or has gone through a bankruptcy proceeding.
If the person was insolvent, either before filing for bankruptcy or while the petition was pending.
If the person had not paid a dischargeable debt.

In other words, section 525 precludes discrimination in employment solely because of a bankruptcy filing, insolvency, or failure to pay a debt. The ban itself on discrimination, as well as the interpretation of the provisions in question applied by U.S. courts, are rather broad. Specifically, it is expressly set out that a governmental unit may not fire a debtor due to their bankruptcy, or discriminate against them with respect to employment, including in the context of hiring. Similar prohibitions are applicable to private employers.

This protection also extends to any individual associated with such debtors or bankrupts. Therefore, it is possible that it may also apply to their business partners, family members, and even friends. What this means in practice is that not only is your employer barred from firing you because you have filed for bankruptcy, but the same should also apply, for example, to a prospective employer considering a job application submitted by your child.

In addition to being protected against job termination or discrimination in the hiring process, the protection granted by the law also encompasses a wide range of other actions amounting to employment discrimination based on your bankruptcy. Accordingly, if you have filed for bankruptcy, you will also be protected in case your employer, or even your company CEO, manager, supervisors, colleague, client, and so on, joke about your financial situation or address you in a derogatory way because you have filed for bankruptcy. You are also protected against being demoted, being denied a promotion, or finding that your job conditions, responsibilities, etc. are being changed due to your bankruptcy, to name but a few examples.

If you feel that you or a person close to you have been discriminated against in an employment context because of bankruptcy-related matters, discuss this with a bankruptcy professional who will offer you the necessary insight as to what options are available to you.

Disclosing Information

One of the things you may be wondering about is whether you have to inform your current or prospective employer about filing for bankruptcy. Even though bankruptcy no longer carries the social stigma it may have once had, it still remains a private matter that many of us do not wish to disclose to third parties. Bankruptcies are a matter of public record , but the decision of whether you wish to share this information with your current or potential employer is largely left to your discretion.

If you are a job applicant or currently employed, you are under no obligation to disclose the fact that you are considering filing or have filed for Chapter 7 or Chapter 13 bankruptcy. You also don’t need to let them know of your post-bankruptcy results. Having said that, if your paycheck is garnished, you will have to inform your employer about the bankruptcy filing, as this will directly affect payroll. Also, if you owe money to your employer—for example, because of an overpayment—the related amount will have to be listed on your schedule of debts in your bankruptcy petition. Consequently, the employer will inevitably be notified of the bankruptcy case, similar to any other creditor.

Likewise, sharing this kind of information when you apply for a job is not required. If, however, they inform you that a credit check will be part of your hiring process, it might be a good idea to let them know beforehand.

Remember that your bankruptcy will become part of your credit report, but it is entirely up to you to authorize who has access to it. Furthermore, although your bankruptcy will be a matter of public record, your credit report itself is not. Lastly, the information included in your credit history will show that you filed for bankruptcy, as well as the accounts discharged, but even those who can view your credit report will have no access to a copy of your bankruptcy petition as such.

Special Provisions Applicable to New York City

Particularly with reference to New York City, legislation prohibits most employers from even learning about bankruptcies during a pre-employee background screening [4]. Under the New York City Human Rights Law Credit Check Law, as amended by the Stop Credit Discrimination in Employment Act [5], employers may not run a credit check on you or hire another company to perform one. Generally speaking, if a company asks you to sign a document letting them check your credit, they will be breaking the law. Similarly, employers may not use consumer reporting agencies or third-party companies, services, and websites to examine your credit history. Therefore, they can’t make inquiries about your payment history or creditworthiness, credit standing, or how much credit you have.

The New York City Human Rights Law Credit Check Law applies to employers who have four or more employees or one or more domestic workers. They do not all have to work in the same location—or in NYC for that matter—and individual owners are also counted toward this number.

Moreover, the said Law may offer you protection whether you are currently working or looking for a job. It stipulates that your credit can’t be the reason you are fired, not hired, or not promoted, nor can it be taken into consideration for the purposes of compensation, benefits, other working conditions, etc. Thus, it effectively bars employers from generally considering credit when making employment decisions about current or prospective employees. Lastly, the protection it offers covers not only full-time employees but also interns, many independent contractors, as well as probationary and part-time employees, among others.

Obviously, the law does not prevent employers from otherwise looking into your background and experience to research your qualifications for a position, including asking for your résumé and references or conducting online searches.

Exceptions

There are eight exceptions to the prohibition against employers using an employee’s credit history to make decisions under the Act, which are to be narrowly construed and apply to specific employment positions or roles rather than to an entire industry or type of employer, or individual applicants or employees:

Employers required by state or federal law, or the Financial Industry Regulatory Authority (“FINRA”) to use a person’s consumer credit history for employment purposes.
Peace officers, police officers, or positions with an investigative or law enforcement function at the Department of Investigation (“DOI”).
Positions that require a DOI background investigation.
Positions that require bonding under city, state, or federal laws or regulations.
State or federal-level positions that require a security clearance.
Non-clerical positions that involve access to intelligence, information, trade secrets, or national security information.
Positions that include responsibility for assets or funds worth $10,000 or more.
Positions involving digital security systems.

The Commission takes seriously the Act’s prohibitions against asking about or using consumer credit history for employment purposes. It will impose civil penalties of up to $125,000 for simple violations and up to $250,000 for violations that are the result of willful, wanton, or malicious conduct [6]. Employees who file claims may be entitled to a wide array of remedies, including back and front pay and compensatory damages. In certain cases, they may even be able to recover punitive damages and attorneys’ fees and costs.

What Happens in Practice

In most U.S. states, including New York, and unlike in many other parts of the world, employment is considered to be “at-will.” Therefore, employers are at liberty to hire and fire employees at their discretion. Also, employees are generally allowed to quit, with or without any notice, without having to face any adverse consequences. Nonetheless, there are significant limitations to the powers of employers, who are barred from terminating employees or taking any other negative employment action based on the employee’s membership in certain protected classifications or their debtor or bankrupt status.

The legal provisions that are in place in regards to employment discrimination based on bankruptcy are very clear. Additionally, case law suggests that courts are willing to adopt a generous interpretation when it comes to protecting debtors against discriminatory practices on the part of employers. After all, the key reasoning behind bankruptcy and its aim of affording consumers the chance of making a fresh start suggests that bankruptcy should not adversely affect your current employment or prevent you from obtaining gainful employment. Consequently, there is no doubt that an employer may not lawfully refuse to hire you or discriminate against you solely because you filed for bankruptcy.

Even so, the critical condition expressed by the word “solely” in the relevant provisions of the Bankruptcy Code should be considered carefully. In reality, it is highly unlikely that an employer will actually discriminate against you on the basis of your bankruptcy and make this known. If, however, you authorize your employer to check your credit report, they may decide not to offer you a job based on other credit issues, judgments, or liens if they were not dischargeable in bankruptcy.

In view of the “sole reason” requirement, employers only have to show that their actions were based, even if only in part, on any other factor other than your bankruptcy. For example, they may claim you performed poorly at your tasks. Therefore, if you suspect that you may have been the subject of such discrimination, it is essential that you keep copies of all relevant information, including your work records, performance evaluations, and any other relevant proof of events and communications that may help you support a potential claim of discrimination.

Remedies

Bankruptcy courts are currently facing a surge in claims stemming from employment discrimination. This shows the increasing impact of this area of law. Employees need to be made whole for losses suffered, while at the same time employers need to be deterred from discriminating. While it is clearly against the law for employers to discriminate against current or prospective employees on the basis of bankruptcy, it does happen. If you suspect that you may have fallen victim to such discrimination, it is imperative that you consider whether there may be some other acceptable reason for the behavior of the employer in question. The key to having a case is to prove that your debtor status was the sole reason for the discrimination you believe you have experienced.

Assuming this can be successfully done, victims of bankruptcy discrimination in the workplace do have rights and may be entitled to various remedies. Generally speaking, before being able to sue an employer, federal law requires employees to go through the administrative complaint process of the Equal Employment Opportunity Commission (EEOC)—a government agency that enforces anti-discrimination laws pertaining to the workplace. Although there are some exceptions to this rule, most cases require this step prior to filing a lawsuit.

The EEOC receives all employment discrimination charges, including bankruptcy discrimination charges, and investigates allegations before issuing a “Right to Sue” letter within 180 days of receiving the charge. This letter allows you to file a discrimination complaint in federal court and pursue a wrongful termination or discrimination action.

If your bankruptcy discrimination case is successful, the remedies awarded can range from the reinstatement of your employment to back pay, non-economic damages, and even punitive damages in special cases. In addition to the above, it is also possible to request the reimbursement of attorney’s fees and costs.

Contact Roemerman Law

Bankruptcy discrimination laws are in place precisely so that you should never have to worry about keeping your job or being assessed for one if you have filed or are considering filing for bankruptcy. If you believe that you have been the victim of bankruptcy discrimination in the workplace or in the context of a hiring process, contact Roemerman Law today for a free consultation so we can discuss your situation and see how we can help you.

References

[1] https://www.law.cornell.edu/uscode/text/11

[2] https://www.law.cornell.edu/uscode/text/11/525

[3] https://supreme.justia.com/cases/federal/us/402/637/

[4] https://www1.nyc.gov/site/cchr/media/credit-check-law-for-employees.page

[5] https://legistar.council.nyc.gov/LegislationDetail.aspx?ID=1709692&GUID=61CC4810-E9ED-4F16-A765-FD1D190CEE6C&Options=ID%7cText%7c&Search=0261

[6] All numbers as of May 2022

Can Employers Discriminate on the Basis of Bankruptcy?