Occasionally, clients will ask me about whether their security clearance is at risk if they file for bankruptcy protection. This came up yesterday when I came across a comment from a reader who expressed real concerns over his fear of losing his clearance if he filed. Why? The simple reason is this: no security clearance = no job. Yet the answer to the question is not an easy one to paint with one large generalized brush. But I’ll do my best.
First, let’s look at why one has a security clearance. Military employees and contractors in the private sector have security clearances at variety of levels depending upon the nature of their job. Why the need for security clearance? Think of it as a way of ensuring that the employee doesn’t keep the back door open – in other words, disclosing information to others that the government does not want disclosed to others.
When one is up to their eye balls in debt, there may be a greater incentive to “keep the back door open.” In other words, an employee might be more willing to accept a bribe – since they need the money to pay down debt. That employee might be considered a security risk. But an employee with a bankruptcy discharge has no lingering debt that might entice the employee to accept a bribe. They are, in effect, debt free. Should that answer alone assure you that you can file without consequence? Well, no.
The US Air Force Academy says this:
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.
What about the bankruptcy filing itself? Is that going to cause problems for military personnel – even personnel who do not have security clearances? Again, from the US Air Force Academy:
The Air Force policy concerning bankruptcy petitions filed by military members is one of strict neutrality. Air Force members have a statutory right to invoke the procedures of the Bankruptcy Act. No adverse actions may be taken against a member of the Air Force for filing a petition for bankruptcy, receiving a discharge of a debt in bankruptcy, or consolidating his debts under a Chapter 13 bankruptcy plan. Similarly, Commanders and Supervisors may not require members to seek financial counseling assistance before allowing them to file bankruptcy. The assets and protection of rights of individual creditors are matters for the Bankruptcy Court and the Air Force cannot intervene in any matter. Creditors should receive no assistance from the Air Force to collect debts and members should be treated like any individual not in military service.
Nevertheless, the underlying circumstances of a case may involve such mismanagement of personal affairs or dishonorable failure to pay just debts as to become factors that may form a basis for adverse action against the member. However, the mere filing of a petition in bankruptcy, or receiving a discharge in bankruptcy is not considered “mismanagement” or “dishonorable.”
So there’s no easy answer. There’s no bright line rule. The answer is largely going to be based on the unique facts of the case, but the best way to start the process of working on that answer is to meet with an attorney.
Related posts:
- When You Discover that You Are a Creditor in a Bankruptcy Case…
- Filing Bankruptcy. Again.
- Another Road to Failure: How Do I Qualify for Bankruptcy?
- No Ticket? No Discharge: The Ticket Out of Bankruptcy
- A Holiday Shopping Tip (or Warning)
Tags: Bankruptcy & Employment, Good Faith, Military, Security Clearances
Very interesting. I have heard that security clearance is largely based on credit history and many other factors. I guess the idea is your spending habits and paying your debt is a large window into character. I agree totally. The personality of people with this type of security clearance is often more important than their abilities to perform the job. Financial problems will make people do crazy things!
Well, let’s be fair. Many people get into financial difficulties for a variety of reasons – none of which reflect poorly on a their character. Divorce, health issues, the loss of a job of a spouse or the death of a family member can all affect the bottom line. I’ve met folks who have incurred debt trying to get food and medicine….and I’ve met folks who have made some profoundly regrettable decisions. I cannot agree with your characterization that the “personality of people” is more important than their ability to do the job.
Far too often, people believe that bankruptcy is not an option they can even consider because they have a security clearance. But I say that whether bankruptcy will interfere with the security clearance will depend on the facts of the particular situation, not some generalized view of security clearances, bankruptcy and the factors that may or may not lead someone to consider bankruptcy as an option.
Thanks for chiming in,
Bill McLeod