Federal Law Prohibits Employers from Discriminating based upon Bankruptcy

Many people who struggle with unmanageable debt are afraid that seeking an economic fresh start through bankruptcy will result in a loss of employment and subject them to future discrimination when applying for new jobs. Sadly, many people needlessly lose years of earnings and opportunities due to this fear.

The Federal law contains very strict protections against employment discrimination based upon an employee’s bankruptcy filing and 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, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt” 11 U.S.C.A. § 525

Notice that this protection applies not only to the debtor, but also to those associated with the debtor, such as a spouse or child. Although not contained in the quote above, this protection also applies to those who are employed by or seeking employment from public employers such as state, local, and federal governmental agencies.

Legally protecting those who file for bankruptcy relief against discriminatory treatment is an important part of providing the debtor a fresh economic start. Employment discrimination based upon a bankruptcy filing has the potential to harm the debtor, creditors, and the marketplace. Debtors who cannot locate or maintain employment have the potential to become dependent upon governmental aid rather than being restored to economic health and contributing to the economic growth of the community. Thus, there are very important and legitimate policy considerations behind this protection.

Employers who violate the law by discriminating based upon a bankruptcy filing can be subject to substantial penalties such as: payment of back or lost wages and benefits; punitive damages; emotional distress damages; and court ordered reinstatement.

Maintaining Employment is an Important Part of Economic Recovery

One important legal point that I think many people miss is that, outside of bankruptcy; an employer may be able discriminate against an employee based upon “bad credit” in certain limited circumstances and if certain rules are complied with. Thus, there are many instances where by not filing for bankruptcy protection an economically distressed employee can leave him or herself vulnerable to discrimination that simply would be unlawful had a bankruptcy been filed.