Bankruptcy and Security Clearance

San Diego is a military town. We have a lot of people working for the military and in the military. Those people often must have security clearances. As a result, I am frequently asked the question: Will Filing for Affect My Security Clearance?

All the way from “classified” to “top secret” clearances, the armed services and the federal government examine each applicant on a case-by-case basis. Check out the official Guideline F: Financial Considerations from the Department of Defense Guidelines for Determining Eligibility For Access to Classified Information. Guideline F lists several “conditions that could raise a security concern,” including:

  • inability or unwillingness to satisfy debts; [this might reflect the poor character, or not]
  • frivolous or irresponsible spending;
  • deceptive or illegal financial practices;
  • failure to file tax returns;
  • unexplained affluence; and
  • compulsive gambling.

Bankruptcy itself is not listed amongst the factors which would result in denial of security clearance.

Notice what’s not listed? Exactly: bankruptcy itself is not listed amongst the factors which would result in denial of security clearance. But, if one or more of the factors listed in Guideline F is/are the cause of the debtor’s now-dire predicament, then security clearance may be denied, revoked or renewal refused. For the vast majority of my clients, I find that those troubling Guideline F factors do NOT show up. Yet, too often, clients have been paralyzed with fear because of misinformation, dreading the worst without even knowing what that is. They often are reluctant to reach out and get the help they so badly need. It is often not the bankruptcy itself that will hurt an applicant, but instead the circumstances leading to bankruptcy.

Let’s talk about some of those factors. The most obvious sources of concern are where the numbers just don’t add up. Unexplained affluence? Example: The employee earns $72,000 / year and is driving a new Audi R8 ala Tony Starks’ Iron Man. Hm..Unless the employee just came into an inheritance, his command may suspect some more sinister explanation for the employee’s wealth. Inability or unwillingness to resolve indebtedness? That may depend on which it is: are you unable or just unwilling to make good on debts? Stonewalling creditors when you have enough income to pay them is poor form at best, and may indicate to your command that you have serious character defects which reflect poorly on your decision making. It’s true that some people are chronically and severely disorganized, resulting in their missing deadlines for payments. Help and support are available for the overwhelmed. Ask for it.

For most of the military service members, I serve and have served, filing bankruptcy will not impact their jobs, clearance, or job trajectory as long as they honestly disclose their situations with command. The red flags fly highest when you try to cover up how bad things are. You may be surprised and relieved to discover how understanding your command can be.

Whether you are active duty or a reservist, or a contractor to the federal government, you are also likewise protected. Section 525 of the Bankruptcy Code specifically protects those who file for bankruptcy:

“(A) a governmental unit may not deny, revoke, suspend or refuse to renew a license, permit, charter, franchise, or another similar grant to, a 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 the Bankruptcy Code…. solely because such bankruptcy or debtor is or has been a debtor under the Bankruptcy Code·”

Counterintuitive, but filing bankruptcy is often the most responsible way to deal with one’s financial problems in the military

It may seem counterintuitive, but filing bankruptcy is often the most responsible way to deal with one’s financial problems. Conversely, ignoring a financial problem may be seen as irresponsible. Guideline F also explores several “conditions that could mitigate [reduce] security concerns,” including:

  • behavior from long in the past, or infrequent behavior;[remember those credit cards issued at your college?]
  • conditions beyond the applicant’s control, such as medical emergency, business downturn, or divorce; and
  • a good-faith effort to repay or otherwise resolve debts.

Consulting with an attorney about filing bankruptcy would definitely qualify under this last factor. In summary, the decision of whether or not a security clearance will be granted to a service member or contractor who files bankruptcy will depend on whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility. You might think of the causes as being either internal or external. An “internal” cause is more serious than an external one. A low credit score is not listed as a potentially disqualifying condition.

External events are often a trigger for our clients to call us. An unexpected medical bill (or sometimes even an anticipated one for necessary medical services, but where you simply cannot afford it), or divorce. Your command is not going to slavishly adhere to a formulaic guideline in figuring out whether you’re “okay” or not. Generally, if you look like you’ve done what you can do to accomplish the “right thing”, you’ll be alright. The worst approach is to stick your head in the sand and ignore the problem. Don’t hide from the problem, don’t conceal information. Transparency is your very good friend when you’re under scrutiny for a security clearance.

Most of my clients are good people who have fallen upon hard times – not gamblers, shopaholics or otherwise irresponsible spenders. Looked at through the prism of your military / federal employer, eliminating your debts through bankruptcy may make you less, rather than more, of a security risk. The Law Office of Paul Staley is proud to represent members of the military, federal employees, and federal contractors who are facing financial difficulties and want to meet them head-on. I’ve experienced first-hand the client who has been referred to me for bankruptcy services by her employer – a federal contractor – and was instructed that if she DIDN’T file bankruptcy, her security clearance (and therefore her job) would be in serious jeopardy. The happy ending: she got rid of her debts, her security clearance was renewed and she still has her job!

If you are considering filing bankruptcy, call (619) 235-4095 or toll-free (877)261-2217 for a free consultation. UPDATE January 3, 2012. Here is what the United States Air Force Academy Legal Office says about bankruptcy:

“The status of your security clearance can be affected, but it is not automatic. The outcome depends on the circumstances that led up to the bankruptcy and a number of other factors, such as your job performance and relationship with your chain of command. The security section will weigh whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident or illness, or by financial irresponsibility. The security section may also consider the recommendations and comments of your chain of command and co-workers. This is an issue that can be argued both ways, so as a practical matter your
security clearance probably should not be a significant factor in making your decision about whether to file bankruptcy. The number of your unpaid debts, by itself, may jeopardize your clearance, even if you don’t file bankruptcy. In that sense, not filing for bankruptcy may make you more of a security risk due to the size of your outstanding debts. By the same token, using a government-approved means of dealing with your debts may actually be viewed as an indication of financial responsibility. Eliminating your debts through bankruptcy may make you less of a security risk.
 There is no hard and fast answer there, with one exception: It never hurts to have a good reputation with your co-workers and your chain of command.”

So ignore the gossip among your peers and get the straight scoop on this subject. Don’t deny yourself, your family, and your career the relief that bankruptcy law created for you. Get the facts. Then make a really well-informed decision. We look forward to helping you with that decision.

If you are getting transferred to the east coast you might call Brian Lee who practices Bankruptcy Law on the East Coast, in Virginia and in Washington, D.C. If you’re in his neck of the woods, he’s already proven he knows his stuff when it comes to security clearances.

The Law Office Of Paul Staley provides legal advice and representation for residents of San Diego County. The information on this website is for general information purposes only. Nothing on this or associated pages, documents, comments, answers, emails, or other communications should be taken as legal advice for any individual case or situation. This information on this website is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship.
Paul Staley
Bankruptcy Attorney
1901 1st Ave., FLR 1 San Diego, CA 92101
Phone: +619 235 40 95

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