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Discriminatory Treatment Protection Under the Bankruptcy Code

The Bankruptcy Code protects bankruptcy debtors from various forms of discrimination based upon the filing of a bankruptcy case, insolvency prior to a bankruptcy case or nonpayment of a debt that was discharged in a bankruptcy case. It also protects other persons with whom a bankruptcy debtor has been associated. Many of these protections are not limited to individuals who have been bankruptcy debtors or who have been associated with bankruptcy debtors.

Discriminatory Treatment by Governmental Units Prohibited

Governmental units are prevented from frustrating the fresh start policy of the Bankruptcy Code by discriminating against persons who have been debtors under the Code or bankrupts or debtors under the prior Act. The Supreme Court has held that a state may not refuse to renew the driver’s license of a debtor whose tort judgment, resulting from an automobile collision, was discharged. Relying on the Supremacy Clause of the Constitution, the court held that such discriminatory treatment resulting from an unpaid debt that was discharged in bankruptcy would conflict with the fresh start policy of the Act.

The Bankruptcy Code prohibits a governmental unit from denying, revoking, suspending or refusing to renew a license, permit, charter franchise or other similar grant to, from conditioning such a grant to, from discrimination with respect to such a grant against, denying employment to, terminating the employment of, or discriminating with respect to employment against any person who has been a debtor or bankrupt. In short, a governmental unit may not discriminate against a person in ways that will frustrate the fresh start policies of the Code.

The list of prohibited types of discrimination does not prohibit consideration of other factors, such as future financial responsibility or ability, and it does not prohibit imposition of requirements such as net capital rules, if applied nondiscriminatorily. It is designed to protect persons from discriminatory treatment based solely on past financial difficulty. Therefore, if there is a bona fide nondiscriminatory examination of future financial responsibility in a particular licensing process, applicable to all persons regardless of the existence of prior debts or any bankruptcy filings, then that is not prohibited discrimination. In addition, if there is a reason for the governmental action taken that is not based upon prohibited discrimination, then there has not been discrimination based solely on one of the prohibited criteria. The Bankruptcy Code does not bar discrimination based upon nonpayment of a debt that is not dischargeable.

The Bankruptcy Code prohibits discrimination based solely on any one or more of several factors. It prohibits discrimination based upon the filing of a bankruptcy case, the nonpayment of a debt that is discharged or dischargeable in a bankruptcy case which has been filed, and/or insolvency regardless of whether the insolvency occurs before the commencement of the case or during the case. The prohibition against discriminatory treatment protects persons with whom the debtor was associated as well. It is applicable to any discrimination that occurs during the case as well as after the case.

Discrimination Based on Commencement of Bankruptcy Case

An easily detectable type of discrimination that is prohibited by the Bankruptcy Code is discrimination based upon the commencement of the bankruptcy case itself. Such discrimination frustrates the purpose of Congress to make the fresh start or reorganization benefits provided by the Bankruptcy Code freely available to debtors who may need them. Discrimination against debtors may deter individuals or others who need to file bankruptcy petitions to deal with problems unrelated to the entity which is discriminating, from making use of the bankruptcy remedies Congress meant them to have. The prohibition against discrimination based upon the filing of a bankruptcy case necessarily extends to discrimination based upon automatic or likely consequences of such filing.

Discrimination Based on Prebankruptcy Debts

The Bankruptcy Code also prohibits discrimination based upon certain aspects of the debtor’s financial condition prior to and during a bankruptcy case. Specifically, it prohibits discrimination because a debtor has been insolvent before the commencement of the case, or during the case before a discharge is granted or denied, and it prohibits discrimination based upon the fact that a debtor has not paid a debt that is dischargeable or has been discharged in a bankruptcy case.

Beyond the area of driver’s licenses, debtors are protected from denial of continued occupancy in public housing based upon dischargeable debts for past rent, from denial of student transcripts based upon dischargeable tuition or student loan debts, from denial of participation as providers in the Medicaid or Medicare Program, and from the denial of a contractor’s license, a real estate license, a liquor license, a license to practice law, an insurance agent license, or a casino license, if the denial is based solely upon nonpayment of a dischargeable debt. Similarly, a governmental unit cannot condition the granting of other privileges, such as the approval of permits, zoning or land use changes, upon payment of discharged debts.

Exceptions to Prohibition Against Discrimination by Governmental Units

The Bankruptcy Code carves out three exceptions to the general prohibition against discriminatory treatment by a governmental unit under federal statutes that allow discriminatory treatment. These are the Perishable Agricultural Commodities Act of 1930, the Packers and Stockyard Act of 1921, and section 1 of the Act entitled ”An Act making appropriations for the Department of Agriculture for the fiscal year ending June 30, 1944, and for other purposes,” approved July 12, 1943. In addition, courts have found that Congress created an implicit exception through its later enactment of provisions making institutions ineligible for participation in programs under the Higher Education Act if they have filed for bankruptcy

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