The Bankruptcy Debtor’s Catch-22

Recently, the US Court of Appeals for the Third Circuit reminded us why bankruptcy laws are not always fair… especially to those current and former bankruptcy debtors who are looking for employment.  In the December 15, 2010 decision of REA v. Federated Investors, the court affirmed a US District Court ruling that the Bankruptcy Code does not create a cause of action against private employers who refuse to hire employees because of a prior bankruptcy filing.

In 2009, the debtor sought a job with Federated Investors.  Apparently, the interview went well, it appeared that the debtor would be hired.  Unfortunately, he was later informed that because of his bankruptcy filing, the Federated refused to hire him.  The debtor had filed bankruptcy in 2002 and received a discharge in 2003.  He sued alleging a violation of § 525 of the Bankruptcy Code which prohibits discrimination.  It provides:

(a) … [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.

(b) 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.

Federated moved to dismiss Rea’s lawsuit on the grounds that the language in the code was clear: there is nothing in the code that prohibits discriminatory practices in hiring by private employers.  Only the government is specifically prohibited from discriminating against job candidates who have sought bankruptcy protection.  The District Court agreed. 

Here’s what’s missing in the facts of the case: a historical view of the facts leading to the debtor’s bankruptcy.  It’s not all together relevant – because the code allows Federated to consider a job candidate’s prior bankruptcy filing in deciding whether to hire, without taking into consideration any of the reasons why the filing happened in the first place.  But some perspective might be helpful in understanding whether the code requires some amendment or clarification.  In other words, if employers are not required to consider the facts and circumstances leading to a bankruptcy filing, should the code be amended? 

I pose this thought because people file bankruptcy for many reasons.  For example, should an employer consider whether the debtor’s bankruptcy was fueled by a family health care crisis, a divorce or a job loss?  Or should they consider it as merely the result of reckless overspending that finally caught up with the debtor? And perhaps more importantly, should every debtor be subject to the same potential consequences regardless of what lead them to the steps of the bankruptcy court in the first place?  Unfortunately, these questions cannot be answered by the Third Circuit – but must be answered by Congress.  And I don’t know if any one else has noticed lately, but these sorts of questions just don’t seem to be on their mind. 

So in this time of economic upheaval, where unemployment figures continue to be unpredictable, people still struggle to make ends meet and the end is no where in sight, people facing the prospect of having to file bankruptcy also face the prospect that such a bankruptcy filing may have a direct negative impact on their ability to obtain a new job.  And in these very difficult times, there’s something about that that just doesn’t seem fair.

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