Filing Bankruptcy and My Security Clearance

Written by Charleston Bankruptcy Lawyer, Russell A. DeMott

Let’s face it. Military families are not immune to financial problems. Here in the Charleston, South Carolina area, there’s a strong military presence with the Charleston Air Force Base and the Naval Weapons Station. And let’s not forget that Charleston is a Coast Guard Sector as well. In addition to wondering about how to deal with their financial problems, service members ask, “How will bankruptcy affect my security clearance?” I’ve also counseled many civil service workers with the same question.

Filing Bankruptcy Won’t, by Itself, Affect Your Security Clearance

Filing bankruptcy or experiencing foreclosure isn’t, by itself, enough to warrant a change in your security clearance, but the circumstances surrounding the decision might. For example, if this is your third bankruptcy and you’ve been experiencing consistent debt problems as a result of poor money management for the last two decades, the government may view this as an indicator of irresponsibility and poor judgment.

However, if you’ve found yourself in debt because of an unexpected unemployment issue or other financial calamity and acted responsibly under the circumstances, then the government will be far less likely to alter your security clearance status. Each security clearance decision is governed by U.S. Department of Defense Revised Adjudicative Guidelines. When considering whether security clearance should be granted, suspended, revoked or generally affected in any way, the guidelines instruct the authorities to examine:

(1) The nature, extent, and seriousness of the individual’s conduct; (2) the circumstances surrounding the conduct; (3) the frequency and recency of the conduct; (4) the individual’s age and maturity at the time of the conduct; (5) the voluntariness of participation; (6) the presence or absence of rehabilitation and other behavioral changes; (7) the motivation for the conduct; (8) the potential for pressure, coercion, exploitation, or duress; and (9) the likelihood of continuation or recurrence.   Directive, Revised Adjudicative Guidelines (AG) ¶ 2(a)(1)-(9)

The Air Force Academy website specifically addresses the issue of bankruptcy and the service member’s security clearance:

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 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 amount 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 here, with one exception: it never hurts to have a good reputation with your co-workers and your chain of command. (emphasis added).

Likewise, the Army has made it clear that bankruptcy will not automatically cause security clearance issues, stating: “[B]ankruptcy will not automatically prevent obtaining a security clearance.   There are many other conditions surrounding financial hardships that often mitigate security concerns . . . [and] 98 percent of cases received by the [Army Central Personnel Security Clearance Facility] which involve financial issues were granted a security clearance. This trend has been consistent since 2005.” The real question is the amount of your unpaid debt, your financial history, the reasonableness of your actions, and the security risk that may arise due to the threat of bribery, coercion, or something similar. In fact, these websites indicate that filing bankruptcy may indicate good judgment and the ability to take financial responsibility on the service member’s part.

Now Let’s Talk Reality

Here’s the reality. If you have financial problems, you must deal with them. I tell my clients that having financial problems is like having a tumor. And there are two ways you get rid of the tumor: (1) you pay the money back (in full or by debt settlement), or (2) you file bankruptcy.

But the tumor doesn’t just magically go away. It must be treated. Not filing bankruptcy to save your security clearance doesn’t make sense. At your next review, the investigator will run your credit. He’ll see the bad debt, the late payments, the foreclosure–you name it. Wouldn’t it be better that he find out you dealt with your mistakes using federal law (the Bankruptcy Code) and that since your bankruptcy, there have been no financial problems?

I’ve represented bankruptcy clients for eighteen years and never heard of a client’s security clearance being negatively affected by bankruptcy. More importantly, I have talked with other bankruptcy lawyers about this. One of these attorneys, San Diego bankruptcy lawyer Michael Doan, has represented over 25,000 clients in his career and never heard of any negative impact on his client’s security clearance. (San Diego is home to Camp Pendleton, a very large Marine Corps base.)

If you need financial help, get it. Sometimes that’s filing bankruptcy, and sometimes not.   What’s important is to deal with your financial problems in a responsible manner. Ignoring your financial problems will certainly not help you obtain or maintain your security clearance. Our bankruptcy law is designed to help the “honest but unfortunate debtor” obtain a fresh start. And this applies to those in the military as well.