Throughout the nation, many states have either made laws or are considering laws curtailing the use of credit checks in pre-employment screening. Little attention, however, is being paid to bankruptcy checks.

Recently, bankruptcy checks have received more attention thanks to a lawsuit filed first in the U.S. District Court of the Western District of Pennsylvania and then appealed in the U.S. Third Circuit Court of Appeal. At the heart of this lawsuit is the U.S. Bankruptcy Code. Section 525(b) of the Code 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.i

Many people, including one Dean Rea, took this to mean that pre-employment bankruptcy checks were verboten in both the government sector and in the private sector.ii

Rea had filed for bankruptcy in 2002 and had his debts discharged in 2003. In 2009, he applied for a job at an investment firm.ii When told that he had not received the job in part due to the bankruptcy, Rea filed suit, asserting that “the court was required to read §525(b) broadly to effect its remedial purpose, and that under that expansive reading, §525(b) does include such a proscription [prohibiting a private employer from refusing to hire an individual because that individual has claimed bankruptcy.]”

For the Court of the Western District of Pennsylvania and the Third Circuit Court of Appeal, the key in determining the case was in §525(a), which addresses the government and states that the government may not deny employment to any person that has been bankrupt.ii As the same phrasing of “deny employment to” is not found in §525(b) regarding private employers, both courts followed a precedent set by the Supreme Court that states “where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposefully in the disparate inclusion or exclusion.”

So why the impromptu legal lesson? While obviously unable to afford the same to government, this judgment in essence allows for businesses with operations in the jurisdiction of the Third Circuit Court of Appeal (much of Pennsylvania and all of Delaware and New Jersey) to continue to run bankruptcy checks on prospective employees unless a separate law prohibits it. More importantly, many may take this to mean that such checks are perfectly fine regardless of where you are located – and this isn’t quite true.

Different circuits may disagree over the proper interpretation of the bankruptcy code. The Third Circuit’s ruling may help persuade courts in other circuits, but does not bind them. In fact, the Southern District of New York ruled differently in an earlier case, taking “discrimination with respect to employment” to include discrimination in denial of employment.ii

Further, the bankruptcy code is not the only law to consider. For example, the Equal Employment Opportunity Act prohibits discrimination against any racial group. Suppose that statistics show that members of a racial minority declare bankruptcy more that other groups. If so, then an employer would have to show that excluding anyone who had declared bankruptcy was job-related and consistent with business necessity.

Long story short: be certain what the local laws and rulings are when determining your hiring program. As always, backgroundchecks.com will help you whenever possible in this endeavor, providing information regarding legal restrictions.

i 11 USC Title 11 – Bankruptcy. (2010, February 01) U.S. Bankruptcy Code. Retrieved March 11, 2011 from http://uscode.house.gov/download/pls/Title_11.txt

ii Rea V. Federated Investors. (2010, December 15) United States Court of Appeals, Third Circuit. Retrieved March 11, 2011 from http://caselaw.findlaw.com/us-3rd-circuit/1548259.html.