Effect of Bankruptcy on Security Clearances

Alabama Attorneys Serving Individuals Reorganizing Their Finances

For government employees, defense contractor employees, or members of the military on active duty, it can be particularly stressful to file for bankruptcy. Often, they are unsure how this process will affect their security clearances. The Department of Defense has guidelines related to this issue, and they include a provision about financial affairs. The concern for the government is whether a debtor tried in good faith to resolve debts or repay creditors before filing for Chapter 7 or Chapter 13. People who are worried about the effect of bankruptcy on security clearances can consult an Alabama lawyer at Grainger Legal Services.

Impact on Security Clearances

Many clearance denials involve financial considerations, so it is understandable to think about the consequences to your security clearance of filing for bankruptcy. In general, however, filing for bankruptcy does not automatically prohibit you from getting a security clearance or force you to lose a security clearance.

Under Guideline F, financial considerations are one of 13 criteria in the Adjudicative Guidelines for Determining Eligibility for Access to Classified Information. These guidelines are established for military and government personnel as well as anybody else who requires access to classified information to do his or her job.

The concern related to your finances is that if you owe an excessive amount of debts, this increases the likelihood you will commit an unethical or illegal action in order to get your debt paid. However, delinquent debt is of greater concern to those determining security clearance than is bankruptcy. Even more important is the cause of the debt. Some debts are unavoidable or understandable. For example, if you were saddled with enormous medical bills due to an emergency or illness, you may owe a large sum of money, but this debt says nothing about your judgment.

An article from the Air Force Academy web site stated the following: “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).”

In the words of one of my clients: “I’ve got to do something or I’m going to lose my clearance anyway.” In our firm’s view, maintaining a security clearance might be easier with a Chapter 13 payment plan – which evidences a desire to pay what you can – than with a Chapter 7 bankruptcy. There is no hard-and-fast rule but it is a factor we take into consideration when making recommendations to our clients with security clearances.

"Bankruptcy" is not referenced in the Adjudicative Guidelines. It is considered an effort by an individual to get financial control over his or her life. Therefore, you should be fine if you file just one bankruptcy in connection with delinquent debts. However, you could run into trouble with multiple bankruptcies, particularly if they are based on debts that are within your control, such as excessive spending, gambling, or maintaining an expensive lifestyle. If the debts in your bankruptcy arise from conditions that could raise a security concern, you may be disqualified from security clearance.

A single Chapter 13 bankruptcy may be a useful option. It shows that you are committed to repaying debtors over a period of 3-5 years, and that you are taking responsibility for your finances. Moreover, you will have to attend credit counseling in connection with filing for bankruptcy, and counselors can help you create a plan for how to spend even after bankruptcy in order to avoid a similar problem in the future and maintain your security clearance.

If you file for bankruptcy and already have security clearances, you should tell your facility security officer about the filing. It is better to be totally honest about your financial situation and bankruptcy rather than to try to hide them.

Legal Guidance When Filing for Bankruptcy in South-Central Alabama

If you have a security clearance or expect to need one for your job, you still may be able to reorganize your finances. South-Central Alabama residents filing under Chapter 7 or Chapter 13 should consider contacting the bankruptcy attorneys at Grainger Legal Services. We can assist employees of defense contractors, active duty military, and many other individuals from our offices in Prattville, Montgomery, and Troy. Call us at (334) 260-0500 or contact us online to schedule a free consultation.