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Bankruptcy and Discrimination

Q: Can an employer terminate a debtor's employment solely because the person was a bankruptcy debtor or failed to pay a debt that was discharged in bankruptcy?

Federal law provides express prohibitions against discriminatory treatment of debtors by both governmental units and private employers. A governmental unit or private employer may not discriminate against a person solely because the person was a debtor, was insolvent before or during the case, or has not paid a debt that was discharged in the case.

The U.S. Constitution grants the federal government the power to set bankruptcy laws and administer bankruptcy proceedings. Accordingly, bankruptcy proceedings occur in federal bankruptcy courts, and bankruptcy law tends to be uniform across all fifty states. It also means that bankruptcy law is a federal matter and can come up before the U.S. Supreme Court and other U.S. Courts of Appeal.

Federal laws against bankruptcy discrimination came about in 1971. In that year, the U.S. Supreme Court decided a case called Perez v. Campbell. Perez held that a state could not deny a person a drivers license because of an unpaid court judgement that had been discharged in bankruptcy. This ruling prompted the U.S. Congress to enact into federal law a more general prohibition against government and private employer discrimination on the basis of bankruptcy.

Governmental Discrimination

Federal bankruptcy nondiscrimination law, such as that found at 11 U.S.C. § 525, prohibits the following forms of governmental discrimination against bankruptcy debtors:

  • Terminating an employee;
  • Discriminating with respect to hiring; or
  • Denying, revoking, suspending, or declining to renew a license, franchise, or similar privilege;
  • Discriminating in regards to bankruptcy when giving a government grant;
  • Discriminating by attaching a condition related to bankruptcy to a grant;

Courts have interpreted this prohibition broadly. Judges have cited it have held that government agencies cannot

This protection against bankruptcy discrimination goes even further. Under the same provision of the United States Code, the government may not discriminate against a debtor in bankruptcy or anyone associated with that debtor. This protection for associates of a bankruptcy debtor can potentially extend to business partners and family members as well.

Private Employers

A private employer may not discriminate against bankruptcy debtors with regard to employment either. The same federal statute that prohibits governmental discrimination against bankruptcy debtors prohibits private employers from similar forms of bankruptcy discrimination. These include bans against:

  • Terminating the employment of an employee who has filed for bankruptcy protection;
  • Discrimating with respect to employment against an employee who has filed for bankruptcy protection.

We mentioned that federal law prohibits governmental discrimination against bankruptcy debtors and anyone associated with them, The same rule is true when it comes to bankruptcy discrimination by private employers. Under federal law, private employers cannot discriminate against employees or potential employees solely on the basis of bankruptcy status, and cannot discriminate against "an individual associated with such debtor or bankrupt." This means that the same protections for anyone associated with a debtor in dealing with the federal government apply in most employment situations with regards to private employers too.

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