Bankruptcy Questions Answered

Afraid that You Could Lose Your Job if You File Bankrutpcy? The Law Says “No,” but….

Last month, my friend and colleague, Charleston bankruptcy attorney Russ Demott published an interesting article on his web site entitled "Fired for Filing Bankrutcy? No way!" This article was written by Elyria, Ohio bankruptcy lawyer Bill Balena, who notes that the Bankruptcy Code specifically forbids "employee discrimination" based on a bankruptcy filing if:

• You are, or have gone through a bankruptcy proceeding
• You are insolvent either before filing a bankruptcy or while your petition is pending;
• You have not paid a dischargeable debt

Let's take a closer look at what the Code actually says.  Pay particular attention to the different language that applies to government employers vs. private employers.

Section 525 of the Bankruptcy Code contains the following language:

As to governmental units:

[with limited exceptions] a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

As to private employers:

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—

(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

As you can see, the restrictions on discrimination are not identical.

Specifically the limitation on governmental action against insolvent or bankrupt employees or job applicants includes the following prohibitions:

• deny employment to
• terminate the employment of
• discriminate with respect to employment against

By contrast the limitations on private employers against insolvent or bankruptcy employees includes the following prohibitions:

• terminate the employment of
• discriminate with respect to employment against

Now I have not litigated this issue – but I think that a private employer could make a strong argument that the Bankruptcy Code does not forbid denying employment to an insolvent or bankruptcy individual who is applying for a job.

Further, as Mr. Balena points out, if you are applying for a job as an "at will" employee, a prospective employer does not have to explain why he is not hiring you – it can be for any reason.  I can't imagine that too many employers would specifically put into writing that you are not being hired because of your credit issues.

In my view, within the context of private employment, Section 525 protections have much more relevance to an employee who already has a job as opposed to a job applicant.  Further, I think that Section 525 is somewhat of a toothless tiger in that few employers would specifically identify a bankruptcy as the sole reason for termination (note the language "solely because").

As a practical matter, I cannot recall the last time I observed or even heard of a bankruptcy debtor facing termination or a refusal to hire because of a bankruptcy filing.  The sheer numbers of bankruptcy filings in the Northern District of Georgia, for example, are such that almost every company of any size has had one or more employees go through the bankruptcy process.  Still, I counsel my clients that Section 525 offers very little in the way of real protection and that there is some risk, even if it is small, that their bankruptcy filing could have a negative impact on employment.

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Forgotten Lawsuit Creates Big Problems for Prior Chapter 7 Client

Earlier this month I received a call from a Chapter 7 client that I had represented several years ago.  He is attempting to refinance his house and has discovered that a judgment creditor has a lien for several thousand dollars.  The creditor was listed on the case, but neither he no I knew that there was any judgment.

I directed him to visit the county courthouse and pull the file for this case.  He did and he reports that the return of service shows that his wife was served by a sheriff's deputy.  His wife has no recollection of being served.  We did list the creditor on the bankruptcy petition but because we did not know that there was a judgment, we did not file a motion to avoid the judgment lien.  What can he do?

There are a number of lessons you can learn from this man's experience.  First, you should always obtain copies of credit reports from all 3 credit bureaus prior to filing bankruptcy.   In Georgia, you can get a free credit report from each of the 3 main credit bureaus twice a year.  Online, you can go to annualcreditreport.com and download your reports.  Because credit reports obviously contain sensitive information the annualcreditreport.com system will ask several questions to identify yourself.  These are usually multiple choice questions – for example, the system may say "your credit report shows that you previously lived on one of the following streets: (a) Oak Street (b) Thompson Street (c) Ivers Road (d) none of the above.

If you are unable to answer these questions, the system will instruct you to mail away for your credit reports – here is a link to a page on my website with the credit report request letters.

Credit reports are helpful because they will usually show pending lawsuits as well as the names, address, account numbers and debt amounts for most of your creditors.  Obviously I can't require all bankruptcy clients to bring me credit reports but it sure helps avoid "forgotten" creditors or judgments.

As far as what we can do, there are a couple of options.  First I want to make sure that service of process was correct.  If you are served with a lawsuit in Georgia, the sheriff's deputy (or private process server) has to complete a document called a "return of service" that states when a party was served and by whom.  Section 9-11-4 of the Official Code of Georgia provides that service on an individual must be made on the defendant himself, or "by leaving copies thereof at the defendant´s dwelling house or usual place of abode with some person of suitable age and discretion then residing therein."

In this case, if the sheriff's deputy served my client's wife, then service is most likely valid.

However, I sometimes see situations where the return of service is unclear as to who was served or even situations where the return of service is blank.  In these cases, a defendant can "collaterally attack" the judgment on the grounds that service was not made and he did not know about the lawsuit.

If it turns out that service is valid, my client will have little choice but to negotiate a settlement of the real estate debt.  Interestingly the Chapter 7 discharge would eliminate any personal liability he might have for this debt, but the liability remains as to his real estate.

My experience has also been that judgment creditors will become more amenable to negotiation the longer a real estate lien remains unpaid.  Here, my client could forego a refinance (or threaten to to forego a refi) and use the argument that the judgment creditor might have to wait for years to get paid as leverage to negotiate a reduced payoff.

Posted in Chapter 7, Chapter 7 issues, Credit, Negotiation, Post bankruptcy credit rebuilding, a, amenable, avoid, bankruptcy and judgments, client, deputy, estate, forego, judgment, lawsuit, letters credit, lien, lien  , longer, my, or, post-bankruptcy, private, process, real, refinance, remains, report, reports, request, served, server, the, threaten, unlisted judgment creditors, unpaid  , wife | Comments Off