The U.S. Third Circuit Court of Appeals has ruled that it is legal for private employers to refuse to hire someone based on a bankruptcy. Rea v. Federated Investors, No. 10-1440 (3rd Cir. 2010). The ruling applies to employers in Delaware, New Jersey, Pennsylvania and the Virgin Islands.
Dean Rea sued Federated Investors, an investment company based in Pittsburgh, after he was turned down for a job because of a previous bankruptcy. The United States Bankruptcy Code prohibits an employer from taking adverse action against an existing employee because of a bankruptcy filing. In this case the Third Circuit declined to extend that protection to applicants for employment.
Despite this ruling, employers should be wary of using prior bankruptcy filings, and more generally credit reports, when making employment decisions, as several U.S. states have laws strictly limiting the use of such information and the EEOC has clearly expressed its opinion that relying on credit history unfairly impacts minority applicants and therefore could constitute race discrimination.