Will I Lose My Security Clearance if I File Bankruptcy?

by Brett Weiss, Esq.

July 4, 2014

The_Pentagon_US_Department_of_Defense_building

Source: Wikipedia Commons

I practice in the Washington, DC area. Lots of my clients work for federal agencies and contractors who require security clearances as a condition of their employment. The first question they ask when them come to see me is whether a bankruptcy filing will cause them problems with their security clearance. The short answer I give: No, it will not.

This causes surprise, in large measure because of the urban legends about bankruptcy that just aren’t true. But why won’t bankruptcy have a negative impact on a security clearance? The reason is simply because bankruptcy makes you less of a security risk.

What makes someone a security risk? According to the Department of Defense, “The purpose of a security clearance is to determine whether a person is able and willing to safeguard classified national security information, based on his or her loyalty, character, trustworthiness, and reliability.” “All available, reliable information about the person, past and present, favorable and unfavorable, is considered in reaching a clearance determination. When an individual’s life history shows evidence of unreliability or untrustworthiness, questions arise whether the individual can be relied on and trusted to exercise the responsibility necessary for working in a secure environment where protection of classified information is paramount.”

Under this standard, it is not the bankruptcy itself that potentially could cause a problem, but the reasons the person files for bankruptcy. For example, if you run a Ponzi scheme, or if you defraud people, or if you committed criminal acts, and file bankruptcy as a result, this could be a problem. But if your or a family member’s illness caused financial problems, or if you were out of work or had your wages cut, or if you got divorced (events that cover almost 90% of all consumer bankruptcies), these don’t impact your reliability or trustworthiness and a bankruptcy that results won’t impact your clearance.

I have represented people who work at DOD, DIA, CIA, NSA and the White House, as well as every branch of the military. I have represented people with every possible security clearance, from Confidential to Top Secret (and the other clearances that have only letters and numbers describing them). NOT ONE has told me that a bankruptcy filing had any impact whatsoever on their security clearance, their job, or their advancement. I have even had clients tell me that their security officer told them that they needed to file for bankruptcy or they would lose (or not get) their clearance! The only requirement is that you tell your security officer before you file so that they know you are not trying to hide anything. They already know that you’re in financial difficulty–bankruptcy shows that you’re addressing the problem and fixing it.

And this makes sense. Bankruptcy allows you to deal with your debt. It allows you to eliminate it, restructure it, and pay it. It enhances your reliability and trustworthiness, and makes you less of a risk that someone will offer to take care of your financial problems in exchange for your password.

So if you are worried that you’ll lose your security clearance if you file bankruptcy, don’t. It will actually help.

Another Appeals Court Approves 2nd Mortgage Stripping in Chapter 20 Cases

by Craig Andresen, Minneapolis, MN, Bankruptcy Attorney

June 19, 2014

Huis en hypotheek onder water

The U.S. Court of Appeals, Eleventh Circuit, ruled that in a chapter 13 case filed within four years of a previous chapter 7 case (a so-called “chapter 20″), the chapter 13 plan could strip a completely unsecured junior mortgage.  Wells Fargo Bank v. Scantling, No. 13-10558 (11th Cir. June 18, 2014).  In such chapter 13 plans, the junior mortgage is eliminated and never has to be paid back.

The lack of a discharge from debt at the conclusion of the chapter 13 case, due its having been filed on the heels of a chapter 7, was not viewed as a problem by the appeals court.

The debtor filed for chapter 7 on November 27, 2009, and received a discharge.  On January 1, 2011, the debtor filed for chapter 13, listing the home’s value at $118,500.  The first mortgage had a balance of $121,808; the second mortgage $79,369; and the third mortgage $24,416.

These figures indicated that the second and third mortgages were not secured by any actual value of the home.  This was due to the first mortgage balance being in excess of the home’s value.

Because the second and third mortgages were in actuality unsecured debts, the chapter plan sought to treat them as stripped or eliminated after completion of payments under the plan, even though no discharge could be granted.

The appeals court held that bankruptcy code sections 506(a) and 1322(b) operated to classify wholly unsecured junior mortgages as unsecured claims to be stripped from the property.  It rejected the bank’s argument that section 1325(a)(5) required a discharge to be entered before a mortgage lien could be stripped.  The court reasoned that by its terms, section 1325(a) applied only to secured claims, and the junior mortgages in the present case were not secured by any value of the home.

The appeals court concluded that the right to receive a discharge upon completion of payments under the plan was irrelevant to whether the junior mortgages could be stripped from the home.

Image credit: © emieldelange – Fotolia.com

“What Do You Mean You Included My Home/Car In the Bankruptcy?!”

by Brett Weiss, Esq.

Good bankruptcy attorneys spend a lot of time talking with their clients. They give them an awful lot of information. Sometimes clients forget. One of the things clients sometimes forget is the requirement in the Bankruptcy Code that all of their assets and all of their debt must be included in the bankruptcy filing. This includes things that they may want […]

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Why Should I Use a Bankruptcy Attorney?

by Brett Weiss, Esq.

Most of my clients don’t have a lot of money. If they need to file for bankruptcy, they’ve usually gotten ads from “Bankruptcy Petition Preparers.” These folks advertise that they can prepare someone’s bankruptcy papers a whole lot cheaper than lawyers. They’re right. They CAN prepare your bankruptcy papers a whole lot cheaper than lawyers. Why? THEY’RE […]

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Minnesota Property Tax Refunds Not Exempt in Bankruptcy, Appeals Court Says

by Craig Andresen, Minneapolis, MN, Bankruptcy Attorney

Reversing the Minnesota bankruptcy court, an intermediate federal appeals court ruled that a property tax refund owed to a bankrupt homeowner cannot be claimed exempt.  Manty v. Johnson (In re Johnson), No. 13-6050 (8th Cir. BAP April 22, 2014). The appeals court said that the bankruptcy court was mistaken when it held that a Minnesota property […]

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Why Replace Chapter 7 Bankruptcy Trustees Now?

by Wendell Sherk, Missouri Bankruptcy Attorney

When someone leaves a job, is it always necessary to replace them?  The bankruptcy system’s watchdog seems to think so, even if that makes little sense. Chapter 7 Trustees are assigned randomly to bankruptcy cases to identify and liquidate property not protected from the creditors.  They are paid $60 per case and nothing else unless […]

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