The Bankruptcy Code makes specific provision for the protection of debtors who file bankruptcy. One of those protections is the right not to be discriminated against once they file bankruptcy. It is comforting for debtors to know that they are protected by specific legal provisions that prevent anyone from discriminating against them or drawing adverse inferences about them once they file a case.
Section 525 of the Bankruptcy Code specifically prohibits these forms of discrimination:
- Discrimination by governmental entities regarding employment
- Discrimination by governmental entities regarding the granting of licenses, permits, or franchises
- Discrimination by private employers regarding employment issues
- Discrimination with respect to the making or insuring of student loans
Under Section 525(a), a governmental entity cannot deny, revoke, suspend, refuse to renew, or otherwise discriminate with respect to a license, permit, or franchise. It also may not deny employment, terminate employment, or otherwise discriminate in any employment-related matter against someone who has filed a bankruptcy.
The protections here are interpreted broadly. Any discrimination interfering with the fresh start intended by the Bankruptcy Code will run afoul of Section 525. Filing a case, failing to pay a dischargeable debt, or being insolvent cannot be used against a bankruptcy debtor, period.
We should also note here that Section 525(a) also prohibits state motor vehicle bureaus from denying drivers licenses to people because of unpaid fines or dischargeable debts in bankruptcy. This section has also been used to prevent discrimination in the denial of real estate licenses, insurance licenses, contractor licenses, and liquor licenses to bankruptcy debtors. Educational institutions (colleges) also cannot withhold transcripts from debtors who have filed bankruptcy. Housing authorities also cannot evict bankruptcy tenants due to dischargeable unpaid rent that was taken care of in a bankruptcy case.
What constitutes a “governmental entity” is interpreted broadly under Section 525. It may include public housing authorities, racing commissions, city water boards, utility boards, and even creditors who act as vicarious agents of the state. The definition of a “person” for Section 525 purposes has been held to encompass both individuals and businesses. Surprisingly, Section 525 also protects people who have been associated with a bankruptcy debtor. In one case, a school district was forbidden to collect discharged school tuition from a relative of the debtor. In Re Dembek, 64 B.R. 745 (N.D. OH, 1986). Of course, the debtor in these situations must show (or show a substantial likelihood) that the discrimination occurred because of the bankruptcy filing, and not because of some unrelated matter.
State motor vehicle departments cannot discriminate against a bankruptcy debtor in license issues, where a debtor has discharged fees, costs, or fines related to drivers licenses. Furthermore, the suspension of drivers license due to a dischargeable traffic fine has been held to be a violation of Section 525(a). Equally important is the fact that governmental entities cannot tamper with licenses, permits, or grants.
Many debtors have real estate licenses, insurance licenses, or other types of licenses, and it is not permitted for any agency to use the fact that a person filed a bankruptcy as a way to treat them differently from someone who has not filed a case. For example, in In Re Bradley, 989 F.2d 802 (5th Cir. 1993), the revocation of an agent’s insurance license by the state insurance commissioner due to the nonpayment of a discharged insurance-related debt was a violation of Section 525.
This section is important in the consideration of licenses and permits of professionals. In one case, a physician who had filed bankruptcy was able to prevent his removal from the state’s list of Medicaid-eligible doctors. Berkelhammer v. Novella, 279 B.R. 660 (S.D. NY 2002). Doctors, dentists, attorneys, insurance professionals, and real estate professionals have all been able to use Section 525 to prevent bankruptcy-related discrimination against them.
Eviction from public housing that happens as a result of discharging rent obligations is also a violation of Section 525. Such attempts to discriminate against a bankruptcy debtor amounts to a roundabout way of coercive debt collection. Furthermore, the denial of a rental application due to notations on a credit report from a bankruptcy filing has been held to be a violation of Section 525(a). In Re Oksentowicz, 314 B.R. 638 (E.D. MI, 2004).
Bankruptcy debtors cannot be discriminated against in employment issues, either. Being notified of a bankruptcy and using that against a person, having to withhold wages as part of a Chapter 13 plan, or otherwise using the fact of a bankruptcy filing in a negative way are all prohibited under Section 525. A debtor who can show that the discrimination was related to the bankruptcy is entitled to injunctive and declaratory relief.