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Can A Bankruptcy Lead to Loss of a Job?

People considering bankruptcy may have concerns about how it will affect their employment. A sluggish job market has not allayed these concerns, but federal law offers protections for people who might fear adverse events at work because of their bankruptcy case. These protections are stronger for public sector employees, but the law also restricts discrimination based on bankruptcy among private employers. Courts are split on exactly how much protection the law gives to debtors employed in the private sector, with most federal district and appellate courts holding that it prohibits discrimination in firing and the conditions of employment, but not hiring. For people who wish to pursue a Chapter 7 or Chapter 13 case, these laws are important to understand.

Federal law prohibits the government and private employers from “terminat[ing] the employment of, or discriminat[ing] with respect to employment against” someone who is or has been involved in a bankruptcy proceeding. 11 U.S.C. § 525(a)-(b). The statute additionally prohibits the government from “deny[ing] employment to” a debtor in a bankruptcy case. Id. at § 525(a). The protections apply to people who have filed a bankruptcy case, people who are insolvent but have not received a discharge yet, and people who have not paid a dischargeable debt before or after discharge. Id.

The protections of § 525 are clearly strongest for government employees. The section dealing with private employers, § 525(b), omits language included in subsection (a) stating that the government may not “deny employment to” a bankruptcy debtor. Most courts have interpreted this to mean that the law does not prohibit private employers from refusing to hire an individual based on a current or past bankruptcy. A New York federal court, however, held that § 525(b) prohibits discrimination in the hiring process by private employers, noting that holding otherwise would impair the “fresh start” policy of the entire bankruptcy system. Leary v. Warnaco, 251 B.R. 656, 658 (S.D.N.Y. 2000). Other courts have disagreed, albeit grudgingly. See e.g. In re Stinson, 285 B.R. 239, 247 (W.D. Va. 2002) (“In the final analysis, the words in the statute do not permit the court to interpret the statute to prohibit discriminatory hiring, however laudable that result may appear.”)

Courts have also set strict limits on the circumstances in which an individual may bring a claim for discrimination based on a bankruptcy filing. A debtor cannot claim discrimination under § 525, for example, if they mentioned bankruptcy to their employer but did not actually file a bankruptcy petition. In re Daniel, No. 11-03009, order (S.D. Ga., May 4, 2012). A debtor must be able to prove that the discriminatory action was “solely” based on the bankruptcy case. Devon Enterprises, LLC v. Arlington Independent School District, No. 4:11-CV-00671-A, mem. op. (N.D. Tex., Dec. 11, 2012).

For people who find themselves in severe financial distress, meaning that their debt burden exceeds their ability to keep making payments, bankruptcy offers a way to relieve those pressures. Bankruptcy can give a person the opportunity to restructure their debts in a more manageable payment schedule, liquidate assets in order to pay down debts, and eventually obtain a discharge of some remaining debts. Since 1997, bankruptcy attorney Devin Sawdayi has handled Chapter 7 and Chapter 13 bankruptcy cases for clients in the Los Angeles area. To schedule a free and confidential consultation to discuss how we can help you, please contact us today online or at (310) 475-9399.

More Blog Posts:

Filing for Bankruptcy After a Prior Discharge Under Chapters 7 and 13, Los Angeles Bankruptcy Lawyer Blawg, August 9, 2013

Supreme Court Rules on Meaning of “Defalcation” in Statutory Provision for Nondischargeable Debts in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, July 30, 2013

Deed from Foreclosure Sale Valid Despite Being Recorded During the Automatic Stay in Borrower’s Bankruptcy Case, Court Rules, Los Angeles Bankruptcy Lawyer Blawg, July 18, 2013


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