Will Filing for Bankruptcy Affect My Security Clearance?

As a bankruptcy lawyer in Virginia and Washington, D.C., an area in which the workforce is heavily reliant upon the federal government, I am often asked the question: Will Filing for Bankruptcy Affect My Security Clearance?

With any security clearance, the federal government examines each applicant on a case-by-case basis. I have extracted 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;
  • frivolous or irresponsible spending;
  • deceptive or illegal financial practices;
  • failure to file tax returns;
  • unexplained affluence; and
  • compulsive gambling.

Note that bankruptcy is not listed amongst the factors for which one can be denied a security clearance. However, if one or more of the factors listed in Guideline F has led the debtor to the necessity to file bankruptcy, then a security clearance could be denied or revoked. It is often not the bankruptcy that will hurt an applicant, but the circumstances leading to bankruptcy.

For most military members, the filing of a bankruptcy will not impact their jobs, clearance, or job trajectory, as long as they honestly disclose their situations with command. Bankruptcy is available to both active and reservists, and contractors to the federal government are similarly protected. Section 525 of the Bankruptcy Code specifically protects those who file for bankruptcy:

…(A) governmental unit may not deny, revoke, suspend or refuse to renew a license, permit, charter, franchise, or other similar grant to, 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.

Filing bankruptcy is often the most responsible way to deal with one’s financial problems. Conversely, not dealing with a financial problem is irresponsible. Guideline F also explores several “conditions that could mitigate security concerns,” including:

  • behavior from long in the past, or infrequent behavior;
  • conditions beyond the applicant’s control, such as medical emergency, business downturn, or divorce; and
  • good-faith effort to repay or otherwise resolve debts.

Seeing an attorney about filing bankruptcy would definitely qualify under this last factor. Basically, whether a security clearance will be granted will depend whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility. A low credit score is not listed as a potentially disqualifying condition.

Most of my clients are good people who have fallen upon hard times — not irresponsible spenders. In the end, eliminating your debts through bankruptcy may in fact make you less of a security risk. Lee Legal 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.

If you are considering filing bankruptcy, call (703) 879-2870 in Virginia or (202) 448-5136 in Washington, D.C. 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 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 there, with one exception: It never hurts to have a good reputation with your co-workers and your chain of command.”

Related posts:

About Brian V. Lee 287 Articles
Brian V. Lee is the Washington, D.C. State Chair of the National Association of Consumer Bankruptcy Attorneys and the lead attorney at Lee Legal. His practice focuses on bankruptcy, business turnaround, and civil litigation.