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Applicant Filed for Bankruptcy: Can You Refuse to Hire Him?

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Have you ever thought of not hiring an applicant because he or she had previously declared bankruptcy? Maybe you thought that was discriminatory. But a court last week said, “Don’t worry.” Private employers won’t violate the U.S. Bankruptcy Code if they refuse to hire. But firing based on bankruptcy status is another story …

Case in Point: Dean Rea was offered a job as an IT project manager at a Pennsylvania company, pending a background check. However, the check revealed that Rea had filed for bankruptcy seven years prior. Based on this new information, the company withdrew its offer.

Rea sued for discrimination under the Bankruptcy Code, claiming it prohibits employers from discriminating based on a person’s previous bankruptcy filing. The relevant section of the code (11 U.S.C. § 525(b)) says, “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.”

The company argued that courts have consistently ruled that the Bankruptcy Code does NOT apply to discrimination in hiring, but only to termination activities.

Ruling: The U.S. Court of Appeals for the 3rd Circuit sided with the company. It dismissed the case, saying the majority of federal courts that have ruled on this issue have said the section doesn’t apply to hiring-discrimination claims.

In upholding a lower court ruling, the appeals court said, "The district court properly declined Rea's request to read the phrase ‘discrimination with respect to employment' in § 525(b) as broad enough to encompass discrimination in the denial of employment … Congress did not so provide. Neither will we.” (Rea v.  Federated   Investors, 3d Cir., 12/15/10)

Note: This ruling applies to private employers. Another section of the Bankruptcy Code says government employers are prohibited from discriminating in hiring based on a person’s previous bankruptcy filing.

3 Lessons Learned…Without Going to Court

1. Use a third party for reference checks. This strategy is a best practice to receive an objective background report.

2. No discrimination in termination. The Bankruptcy Code prohibits discrimination based on bankruptcy filing when it comes to firing an employee.

3. Remember the public/private divide. The Bankruptcy Code has different standards for private employers versus government employers.

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{ 5 comments… read them below or add one }

jose February 8, 2011 at 10:17 pm

Unfortunately, a private employer has the option to hire or not to hire those who have filed bankruptcy which will definitely lead to discrimination because they can deny employment to a minority who has filed bankruptcy while hiring a non-minority who has without any explanation. The law will definitely not be applied equally as minorities will be seen (regardless of the circumstance that led to bankruptcy) as taking advantage of the system while non-minorities will be seen as those that have had issues and deserve second chances. If you do not believe this then just look at the history of USA when it comes to denying opportunities to people of color.


Karen January 5, 2011 at 9:51 am

I am very concern that employers are allowed to view any credit type history. I am the Director of Operations for a large medical specialty group. You would probably think I should feel different. We do background checks for criminal records, employment history, school, etc, but we have not performed credit checks. I believe that if someone has been involved in mis-handling of monies, that with the current backgrounds checks we have, we would find out about them. We have not had any problems to date.

Unfortunately for the 1st time in my life I am experience fiancianal problems due to my ex-husband, medical bills, a complicated divorce, and I recently had to hire an attorney to represent me as a notary of SC due to a person claiming she didn’t sign a waiver of beneficary. Fortunately, the case was dimissed, but I am left with much expense. One of my attorneys advised me to file bankruptcy due to the heavy expense load. Now here I am worried that I will not be able to find another job if need be or worst yet, if the practice I am with sells to a hospital and they run a credit check I am out of a job. I did not ask for any of this and these circumstances were out of my control.
Of course I would be honest and explain my situation, but having been part of an HR department in the past, I know how they “really” work.


R B December 28, 2010 at 7:09 pm

The law is what it is. I don’t understand from the above posting who the people of diversity are? The courts have applied the law all the same. Does the case note what “group” of people she belonged too. That is the ignorance of today. As long as the courts read and apply it the same across the board then they are doing their job and applying the law equally. There is no discrimination on any group or that it’s working against.

We as the people have to take our own responcibility for wanting more, aquiring our debt and taking care of it. If we make poor choices then it’s our fault and we take everything that comes with it. As one of those, I can’t blame the law or anyone else for my choices and how they impact me.

You can still move forward and make your life better. It just takes a different route and more work. Sucks for those of us that take that way, but glad to hear the courts are doing what they should be.


Peg December 28, 2010 at 2:51 pm

I am wondering whether the rule regarding government employers would extend to employers with government contracts, such as non-profit recipients of federal grants?


Yancey the BasicEmployeeRightsAdvocate December 23, 2010 at 8:25 pm

An amazing hypocrisy in the law that says bankruptcy discrimination in hiring is ok as long as it is in the private sector. Hmmm…..That wouldn’t be because the overwhelming majority of employment for people of diversity is private business?

This ruling only underscores the ever increasing need for career seekers to learn what their basic workplace rights are. Especially those involving background checks, reference checks, FCRA, etc.
This is particularly true for diverse groups who are always far more severely impacted by economic downturns that lead to bankruptcy.

It appears whether intentional or not to limit or restrict the availability and ability for certain groups to avail themselves of bankruptcy protection with the threat of potential economic punishment. The denial of the very employment that would allow a career seeker to improve his/her economic condition based on prior bankruptcy is absolutely ludicrous, in my opinion.


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