Bankruptcy debtors often ask about the future ramifications of their decision to seek relief under the Bankruptcy Code[1. Most questions revolve around rebuilding credit in order to buy a future house or car. The answer to that question is often subjective and depends on the individual, with the individual’s future employment prospects being a key factor.
Another question frequently raised is whether a bankruptcy filing will affect future job prospects. Typically, a prior bankruptcy will not cause discrimination against the individual. The Bankruptcy Code provides certain protections from employment discrimination to both government and private sector employees. In addition, the recently enacted Illinois Employee Credit Privacy Act provides additional protection to job seekers. This article will explore these statutory protections against bankruptcy related job discrimination.
Bankruptcy Code Protections. The Bankruptcy Code provides protection against job discrimination in 11 U.S.C. §525. Section 525(a) reads in pertinent, 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 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 Bankruptcy Code further defines governmental unit to mean, “United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.”
Section 525(a) goes beyond protection from just job discrimination. The section is meant to codify the Unites States Supreme Court opinion in Perez v. Campbell. In Perez, the Court held that a state could not suspend the otherwise valid driver's license of a debtor who had received a bankruptcy discharge of financial responsibility for a tort case judgment resulting from an automobile collision. The Court reasoned that the state financial responsibility law was unconstitutional in light of the rehabilitation policy of the Bankruptcy Act.
However while Section 525(a) at first glance appears broad, it is of limited scope. The section only applies to discrimination by government entities. Protected “persons” include only an individual, partnership, or corporation. The acts prohibited by the statute are specific: denying, revoking, suspending, or refusing to renew a license, permit, charter, franchise or other similar grant; denying employment; terminating employment; or discriminating with respect to employment. Most importantly, section 525(a) does not apply to private sector employers.
Bankruptcy debtors employed in the private sector do not get the broader protections provided by Section 525(a). Debtors employed by private sector employers are covered by section 525(b) of the Bankruptcy Code. Section 525(b) states, “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. “
Thus, Section 525(b) only prevents a private employer from terminating the employment of an individual or discriminating with respect to employment of an individual solely because of filing a bankruptcy. The statute with respect to private employers only includes protection to individuals and does not include protection from discrimination in hiring as does section 525(a) relating to government units.
While sections 525(a) and (b) provide some protections, they are not all inclusive and in practice can be limited. Both sections 525(a) and 525(b) contain the same exception in that they only prevent discrimination that is based solely on the protected party having sought relief under the Bankruptcy Code.
In a practical sense, an employee or job seeker may not know the exact reason for refusal to hire, termination or retaliation in the workplace. One can easily envision an employer giving other reasons for the discrimination or retaliation besides the filing of a bankruptcy case.
Not surprisingly, questions regarding job discrimination or retaliation based on a person filing bankruptcy arise in the financial industry. In the private sector these claims arise under section 525(b).
Persons who handle money or have access to money are usually under close scrutiny by their employers. One illustrative case is found in Laracuente v. The Chase Manhattan Bank. In Laracuente the employee was terminated eighteen months after her bankruptcy case. She claimed that the reason for the firing was her bankruptcy case. The bank responded that she had violated loan policies and practices by granting loans to various family members. The court held that because the bank had established other reasons for the discharge of the employee that section 525(b) did not apply.
While Laracuente is a private sector case under section 525(b) it illustrates the difficulty of prevailing in an action due to the statute’s limiting term “solely.” Similarly, an action under section 525(a) against a government unit would be subject to the same defenses as it too contains the limiting term “solely.”
Refusal to hire a prospective employee because of a prior bankruptcy case was the subject of dispute in Pastore v. Medford Savings Bank. In Pastore the individual had passed the interview process with approval, but was ultimately denied employment based on a prior bankruptcy filing. The court ruled that section 525(b) did not apply to failure to hire cases involving private employers, but only to termination and discrimination of a current employee. In a 2010 opinion by the Third Circuit Court of Appeals in Rea v. Federated Investors, the court articulating the majority view regarding the scope of section 525(b) as applying only to current employees. However, a New York district court expanded section 525(b) to include refusal to hire based on the overriding principle of a “fresh start” for bankruptcy debtor in a 2000 opinion.
Discrimination in the workplace based on a prior bankruptcy case was the subject of Hicks v. First National Bank of Harrison. In Hicks the plaintiff brought an action against her employer after she was reassigned from her teller job to an operations position away from customer contact after she filed for bankruptcy. The court ruled that the plaintiff showed that her reassignment was based solely on the fact that she had filed bankruptcy and ordered the bank to restore her prior position.
Illinois Employee Credit Privacy Act. Illinois Governor Patrick Quinn signed the Employee Credit Privacy Act (the “Act”) in August of 2010. The intent of the Act is to limit employers from requiring prospective or current employees to submit to a credit check or to provide information about their past financial history. The Act went into effect on January 1, 2011.
Under the Act, the definition of “employer” specifically excludes law enforcement agencies, debt collectors, banks and insurance companies. Also excluded are state or local government agencies which otherwise require use of the employee's or applicant's credit history or credit report, though no examples are given.
The Act defines "credit history" to mean an individual's past borrowing and repaying behavior, including paying bills on time and managing debt and other financial obligations. The term "credit report" in the Act means any written or other communication of any information by a consumer reporting agency that bears on a consumer's creditworthiness, credit standing, credit capacity, or credit history.
Section 10(a) of the Act provides that a employer shall not: (1) “Fail or refuse to hire or recruit, discharge, or otherwise discriminate against an individual with respect to employment, compensation, or a term, condition, or privilege of employment because of the individual's credit history or credit report;” (2) “Inquire about an applicant's or employee's credit history;” or (3) “Order or obtain an applicant’s or employee’s credit report from a consumer reporting agency.”
Section 10(b) provides that section 10(a) does not apply “ . . .if a satisfactory credit history is an established bona fide occupational requirement of a particular position or a particular group of an employer's employees.” Section 10(b) provides, “A satisfactory credit history is not a bona fide occupational requirement unless at least one of the following circumstances is present: (1) State or federal law requires bonding or other security covering an individual holding the position. (2) The duties of the position include custody of or unsupervised access to cash or marketable assets valued at $2,500 or more. (3) The duties of the position include signatory power over business assets of $100 or more per transaction. (4) The position is a managerial position which involves setting the direction or control of the business. (5) The position involves access to personal or confidential information, financial information, trade secrets, or State or national security information. (6) The position meets criteria in administrative rules, if any, that the U.S. Department of Labor or the Illinois Department of Labor has promulgated to establish the circumstances in which a credit history is a bona fide occupational requirement. (7) The employee's or applicant's credit history is otherwise required by or exempt under federal or State law.”
Section 25 of the Act provides the right of civil action to any person injured by a violation of the Act and provided both the availability of injunctive relief, damages, costs, and reasonably attorney’s fees to a prevailing plaintiff.
The Act appears on its face to provide significant amount of protection to applicants and employees. Employers who regularly made inquiries into credit history as a condition of employment or of promotion must heed the prohibitions or face potential action from the injured party. While significant exceptions apply to the Act, there are many positions where the Act would be applicable. Thus, the Act is a potential pitfall for employers who are unaware of its provisions.
Conclusion. The decision to file bankruptcy is not one taken lightly. Clients often delay filing due to fears of retaliation, job discrimination, or refusal to hire based on a prior bankruptcy case. The Bankruptcy Code provides some protection against these fears, though the standards differ when the employer is a government unit as opposed to a private sector employer. Job seekers in the government arena have protection from refusal to hire; private sector applicants do not. Employees in both the public and private sector have protection against retaliation or discrimination.
Adding another layer of protection is Illinois’ Employee Credit Privacy Act which took effect on January 1, 2011. Under this law, many employers are prohibited from obtaining a credit report or otherwise inquiring into the financial past of a prospective or current employee. While banks, financial institutions, law enforcement and other limited categories of employers are exempt from the law, most employers are not. Attorneys should familiarize themselves with these laws in order to provide competent counsel to their affected clients.
 11 U.S.C. §101 et. seq. (2010).
 11 U.S.C. §525(a) (2010).
 11 U.S.C. § 101(27).
 402 U.S. 637, 91 S.Ct. 1704 (1971).
 Id. at 652, 91 S.Ct. at 1712.
 11 U.S.C. §525(b).
 891 F2d 17 (1st Cir. 1989).
 186 B.R. 553 (D. Mass 1995).
 No. 10-1440, 2010 WL 5094250 (3d Cir. 2010).
 Leary v. Warnaco, Inc., 251 B.R. 656 (S.D.N.Y. 2000)
 65 B.R. 980 (Bankr. E.D. Ark. 1986).
 820 ILCS 70/1 et. seq.; P.A. 96‑1426 (2010).
 Id. at 70/5.
 Id. at 70/10(a).
 Id. at 70/10(b).
 Id. at 70/25.
Arthur Rummler is a sole practitioner with an office in Glen Ellyn, Illinois. He concentrates his practice in all phases of bankruptcy, including consumer, business and trustee cases. Mr. Rummler is a 1987 graduate of the University of Michigan Ross School of Business Administration and a 1991 graduate of the Chicago-Kent College of Law. Actively participating in the DuPage County Bar Association, he is currently serving as a member of the DCBA Brief Editorial Board, Vice Chair of the Law Day Committee and has appeared in Judge’s Night for the past four years.