Bankruptcy and Security Clearances

So what happens to your security clearance if you file for bankruptcy protection?  Is it revoked? Will you be terminated from your job?  Will you be demoted?  Does your salary decrease?

While there are bankruptcy code provisions that regulate the public and private sector over discriminations in employment when one files for bankruptcy protection, most employers also have policies and procedures they abide by when when is comes to determining future security clearances after bankruptcy.

To start, the Bankruptcy Code provides at 11 USC 525 that employment discriminations are prohibited by public and private employers against individuals that file for bankruptcy protection:

PUBLIC: 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 this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

PRIVATE: No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt–

(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;

(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or

(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

So generally speaking, your employment status should not change.  But what about your security clearance.  Much of this inquiry ultimately depends upon the nature of your debt, the reasons for your financial troubles, and your efforts to alleviate the same.

The US Air Force Academy Website has this to say about security clearances for individuals that file for bankruptcy protection:

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.

Generally speaking, and at least in this author’s opinion, most security clearances are not affected by bankruptcy.  Indeed, even top secret security clearances are rarely if ever affected.  To date, not one bankruptcy client in over 25,000 cases this author has filed since 1995 has advised that their security clearance has been revoked or compromised.  And this opinion is not rare. To quote from another attorney in the LA area:

I had someone come to my office a few years back from the U.S. Department of Personnel.  He flashed his badge (he was actually in a trench coat as well) and asked to see my client’s file.  After a few questions, and a phone call to my client, he explained that my client was going through the regularly scheduled review of her top secret security clearance.  He looked at the file and was most concerned that she was paying my fees and working towards filing her case.  Once he finished we spoke for about 30 minutes during which I asked him the question you posed.  The answer I got was that the government is looking for situations where someone with security clearance can be compromised.  He said when they see a lot of debt that is not being paid they begin to get concerned because the individual may be more inclined to take a bribe, or as he put it “leave the back door open for $5,000.”

He explained that they are less concerned when they see a bankruptcy because the problem, and the perceived security threat, is being eliminated.  Our firm has represented dozens and dozens of people with security clearances over the years and to my knowledge not one of them has had an issue.  According to the gentleman I spoke with unresolved delinquent debt is a bigger problem.

So if you are considering filing for bankruptcy protection but have concerns over your security clearance, rest assured that you should be fine in all but the rarest of cases.  Moreover, to better the odds you already have stacked well off in your favor, have a good rapport with your command and be sure to portray how bankruptcy was merely being used as tool to take responsibility of a situation beyond your control.

Written by Michael G. Doan