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Feb 02, 2011

The Economy - What HR Professionals Need To Know

By: Paul Ebeltoft

The recession of 2008 destroyed more personal wealth than any other event since the Great Depression. One of the sad effects is that persons displaced in the job market are becoming increasingly desperate to get back in. A recent survey by found that almost 25% of your applicants either have or would lie to you in the job interview process.

As personal finances are going the way of Lindsay Lohan’s career, it is becoming increasingly likely that some of your applicants’ falsehoods will include fudging about past fiscal responsibility. The purpose of this article is not to suggest that past personal economic instability is a predictor of a potentially dishonest employee. At the same time, it is true that, for hiring decisions, a poor credit history can be a substantial negative factor.

As human resource professionals, you are aware that you must comply with the Fair Credit Reporting Act to obtain a credit report. But, what do you do when you lawfully learn of an applicant’s ongoing or prior bankruptcy?


Consider the case of a Pennsylvania man, Dean Rea. Rea filed for bankruptcy in 2002 and the Bankruptcy court discharged his debts in 2003. In 2009, Rea applied for employment with Federated Investors. Although it appeared after Federated interviewed him that Rea was the successful applicant, Federated refused to hire him when they learned of his bankruptcy. There was, apparently, nothing in his background, other than his bankruptcy, to stain Rea’s past conduct or character.

Rea sued Federated. Rea claimed, rightly, that a government employer could not have denied Rea employment because of the bankruptcy or, once hired, fired or discriminated against him for a past or future financial failure. Rea claimed, again rightly, that no private employer may terminate the employment of or discriminate with respect to an individual who has been or who is associated with a bankrupt. Why then, Rea argued, should a private employer be able to use the bankruptcy against him as a job applicant?

Rea lost. His logic was good but the law as written by Congress, the court found, did not extend as far as Rea’s logic.

Consider, however, the case of New Yorker, Marlene Leary. She received her discharge in bankruptcy in 1999. Later that year she interviewed for a job with a private employer called Warnaco, Inc. Warnaco awarded Leary the job, subject to the results of a credit report. The report disclosed her bankruptcy and Warnaco refused to hire her.

Leary sued. Unlike poor Rea, she won. In Leary’s case, the court found that the law is clearly broad enough to extend to a private company refusing to hire a bankrupt solely on those grounds. The court said, “The evil … is no different when an employer fires a debtor simply for seeking refuge in bankruptcy, [than] refusing to hire a person who does so. The ‘fresh start’ policy is impaired in either case.”


First, remember:

• If you are working in HR for a governmental employer, you cannot use a bankruptcy to discriminate against an applicant or a current employee.
• If you are a human resource professional in the private sector and you obtain notice of the bankruptcy of a current employee, you cannot discriminate because of the bankruptcy.

The only grey area is for private employers who are considering applications for employment. In this regard, commentators and courts increasingly believe that it is the Rea case, not the Leary case, which will eventually hold sway.

However, until that is decided, the safe path for private employers is to disregard a prior bankruptcy, however disclosed, in a hiring decision. If your company would not otherwise hire an applicant for valid, non-discriminatory reasons, and you learn of the applicant’s bankruptcy, be sure to document the business-related reasoning for rejecting the applicant. Be sure to use these reasons as the basis for your eventual hiring decision.

Reprinted with permission from an article submitted for publication in the February 2011 Southwest Area Human Resource Association newsletter.