Available at: https://ssrn.com/abstract=5242161
Abstract
Employers often perform credit checks on prospective employees. Twelve states have banned this practice with the goal of improving employment prospects for individuals with poor credit histories. An unintended consequence of these bans is that they reduce the incentive to repay debt. This paper provides the first causal evidence of how pre-employment credit check bans (PECCBs) affect debt repayment. I find that PECCBs increase the probability of bankruptcy by 0.9 percentage points on average, equivalent to a 17.6% increase from the mean. The probabilities of past-due accounts and collections are unaffected on average, but heterogeneity by credit score prior to treatment shows that these probabilities increase among all consumers except those with the lowest scores. These findings show that consumers are sensitive to changes in the penalty for default, especially when they are deciding whether to file bankruptcy.
Commentary:
Sarah Papich’s working paper makes the bold claim that pre-employment credit check bans (PECCBs) lead to a 17.6% increase in bankruptcy filings. The suggestion is that by removing a potential employment penalty, these bans lower the "cost" of default—encouraging more strategic bankruptcy filings, particularly among consumers with mid- to high-range credit scores.
But from a bankruptcy practitioner’s perspective, this analysis leaves out several crucial elements:
1. 11 U.S.C. § 525(b) Already Prohibits Certain Employment Discrimination:
Papich’s premise is that PECCBs uniquely shield job applicants from negative credit information—particularly bankruptcy—being used against them in hiring decisions. But this overlooks the fact that § 525(b) of the Bankruptcy Code already prohibits private employers from terminating or discriminating against an employee solely because they filed for bankruptcy. While the statute doesn’t extend to hiring decisions, its existence undermines the idea that bankruptcy is, across the board, a signal of “irresponsibility” to employers. Congress has already taken steps to prevent such stigma in the workplace—something the paper does not acknowledge.
2. Bankruptcy Is Not Taken Lightly:
Characterizing post-PECCB bankruptcies as “strategic” also feels untethered from day-to-day consumer bankruptcy practice and falls prey to flawed assumptions that debtors are merely homo economicus, making perfectly rational, self-interested decisions to consistently maximize their personal gain or utility.
Most Chapter 7 and 13 filings arise from life events—job loss, illness, divorce—and a gut-wrenching decision, not clever calculations about employment incentives. Even if some consumers become slightly more willing to file because the perceived consequences are less dire, that doesn’t make those filings frivolous. It might mean the system is working: consumers finally see a clearer path to both financial and occupational recovery.
3. Bankruptcy Makes for Better Employees—Even the Military Thinks So
Contrary to the stigma, employees who file bankruptcy often become more reliable workers. By shedding the stress and chaos of unmanageable debt—wage garnishments, creditor harassment, and financial stress—filers regain focus and stability. Bankruptcy offers the kind of clean slate that allows people to show up fully in their jobs.
Even the Department of Defense recognizes this. Under the Uniform Code of Military Justice, unpaid debts can trigger discipline or loss of security clearance. But filing bankruptcy? That’s often seen as a responsible step toward financial recovery. In fact, DoD clearance adjudicators routinely favor bankruptcy over default. If the military trusts bankruptcy filers with national security, civilian employers should too.
4. Bankruptcy Attorneys Should Support PECCBs
Far from being a problem, PECCBs help reduce the very employment stigma that keeps people trapped in cycles of debt. Consumer bankruptcy attorneys should welcome PECCBs as public policy that aligns with the core promise of bankruptcy: the fresh start.
Bankruptcy isn't just about discharging debt—it’s about restoring access to opportunity. When job applicants are excluded because of credit histories that often reflect structural hardship more than personal failure, it undermines the rehabilitative function of bankruptcy itself. Banning credit checks in hiring expands economic participation and reduces the shame and fear surrounding bankruptcy—making it a more effective tool, not a more reckless one.
While this paper’s quantitative rigor is valuable, its framing risks reinforcing the myth that consumer bankruptcy is driven by gamesmanship rather than necessity. More importantly, it fails to consider that PECCBs complement, rather than conflict with, the Bankruptcy Code’s protective spirit. For those of us working with debtors every day, that’s not a flaw in the policy—it’s the whole point.
See the attached for States with Pre-Employment Credit Check Bans
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