Employers are constrained by dozens of rules and regulations limiting their hiring criteria. In today’s economy, one question that often arises is whether employers may refuse to hire bankrupt job applicants. Surprisingly, the answer for private employers may be yes.

Bankruptcy Code section 525(b) provides that a private employer may not “terminate the employment of, or discriminate with respect to employment against” a person who is or has been in bankruptcy. Increasingly, Courts interpreting this provision have held that it does not prohibit a private employer from denying employment to an individual on the basis of a pending or prior bankruptcy filing.

The Eleventh Circuit Court of Appeals, in Myers v. TooJay’s Management Corp.,1 is the most recent circuit court to weigh in on the issue. In early 2008, Eric Myers filed for Chapter 7 bankruptcy relief and obtained a discharge. Later that year he applied for a restaurant job at TooJay’s and received a conditional offer of employment. As part of the application process, Myers executed a release form permitting the restaurant to conduct a comprehensive background check, including a review of his credit history. A few days later, TooJay’s rescinded Myers’ employment offer based in part on a credit check that showed Myers’ prior bankruptcy. Myers sued, claiming that TooJay’s had discriminated against him in violation of Bankruptcy Code Section 525(b). The district court disagreed, and entered judgment against Myers and in favor of TooJay’s. On appeal, the Eleventh Circuit affirmed.

In reaching its conclusion, the Eleventh Circuit compared the language of Section 525(b) to that of Bankruptcy Code section 525(a), which states that a governmental unit may not “deny employment to, terminate the employment of, or discriminate with respect to employment against” a person who is or has been in bankruptcy. Here, the Court noted that the wording of Section 525(b), pertaining to private employers, does not contain the phrase “deny employment to.” Rejecting Myers’ argument that a literal reading of the Bankruptcy Code provisions would deny debtors a “fresh start,” the Eleventh Circuit concluded that Section 525(b) does not prohibit discrimination by private employers against prospective job applicants on the basis of a pending or prior bankruptcy filing.

The Eleventh Circuit noted that its conclusion is supported by published decisions in the Third and Fifth Circuits, as well as a number of other lower federal courts.2 Accordingly, it appears that in Alabama, Delaware, Florida, Georgia, Louisiana, Mississippi, New Jersey, Pennsylvania, and Texas the law is now settled that private employers may refuse to hire applicants based upon pending and prior bankruptcy filings. In the remaining states, how Section 525(b) will be interpreted continues to be uncertain, although the trend in the lower courts even outside of the Third, Fifth, and Eleventh Circuits seems to be to follow Myers.

Notwithstanding the decisions discussed above, employers need to remain cautious. Section 525(a) expressly prohibits a government employer from refusing to hire an individual based on a past or current bankruptcy filing, and Section 525(b) prohibits all employers from terminating or otherwise discriminating against current employees on this basis. Employers should consult counsel before taking adverse action against a job applicant or employee who declared bankruptcy in the past.