“Can I lose my security clearance if I file for bankruptcy?

This is a question that I often hear from members of the Armed Forces, employees of the Transportation Security Administration and others in Federal service or employment.

In my experience, the answer is No!

In fact, I have had a number of occasions over the years where people seeking employment with the TSA or a promotion have been told to go file for bankruptcy.  I have also had people in military service that have not only not lost their security clearance because of a bankruptcy, but have actually received promotions during or after filing

Why?

Because a person in dire financial straits is at risk of making a poor decision such as taking a bribe in an effort to get out of debt.  Since a Chapter 7 can get rid of most debt, and a Chapter 13 can allow the debt to be paid out in a reasonable manner, the motivation to make an unwise decision is gone.

But you don’t have to take my word for it,  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.”

In other words, filing bankruptcy is not the reason a security clearance is revoked. A more important issue is how your debts were incurred. For example, debts incurred from gambling or consistently living beyond your means are heavily frowned upon. Debts from circumstances outside your control, such as a job loss due to the economy, decreased household income because of a divorce, or large expenses for medical treatment are more easily mitigated.

Finally, I would note that section 525 of the Bankruptcy Code states that:

“…(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 the debtor has been a debtor under the Bankruptcy Code.”

Whether a tax refund will be taken by the Trustee in a Chapter 7 bankruptcy will depend on several factors.

As a general rule, the amount of taxes withheld from your pay are prorated over the entire year.  This means that the portion of the tax refund for the time before the bankruptcy filing is property of your bankruptcy estate and is available to be used to pay your unsecured creditors.

As an example, if you filed a bankruptcy petition on December 1, the withholding from January through November is part of the bankruptcy estate.

At the 341 Creditor’s Meeting, the Trustee will usually advise the Debtor as to whether or not he will “administer” the tax refund.  This decision will be based on a review of the tax return(s) provided to the Trustee.

For a tax refund to be worthy of administration, the Trustee will consider several factors:

• The amount of the refund.  Often if a refund is small, the Trustee will not take it simply because it is not cost effective to distribute it to the unsecured creditors.
• Exemptions.  Depending upon the state in which you live, the funds may be exempt under federal exemptions, state exemptions which permit a cash exemption or a “wild card” exemption, or an earned income tax credit exemption.  In Louisiana, where I practice, we have a specific earned income credit exemption.
• Prior year(s) unpaid taxes.   Taxes are normally a priority debt.  If the refund is going to pay past due taxes, then the trustee will not take it since the priority debt must be paid before an unsecured debt is paid.

When possible, the easiest way to avoid having to give up a tax refund is to file the return, receive the money and spend it before the bankruptcy is filed.  Paying for things such as pre-filing legal fees as well as the day to day necessities of life are permissible uses of a tax refund.

The receipt of a refund is only one issue in determining when to file a bankruptcy.  Other issues like a pending foreclosure, repossession, or the expected receipt of a bonus can all affect the timing.  Also, local practice in the court where you file will be a factor.

Filing a Chapter 7 or Chapter 13 bankruptcy can get your Driver’s License back for you when you have lost your license because of no have insurance!

Many States require people that own cars to have motor vehicle liability insurance.   These laws, often called compulsory motor vehicle liability laws, generally require that if you own a car, that you maintain at least a minimum amount of insurance on your car so that if you are involved in an accident and you cause damage to someone else’s car or injure them, that they can recover from your insurance for their damages.

Unfortunately, car insurance is expensive, and when someone is having financial problems, they may decide to stop paying for their car insurance and let the policy be cancelled.  Debt collectors will call and yell, but nobody calls to yell at you if you don’t pay your insurance bill.

To give teeth to these vehicle liability laws, many States may also suspend a Driver’s License upon notice by an insurer of the cancellation of the policy or upon notice of an accident with no insurance available to pay for the damages.

While it is never a good decision to drive a car without insurance, the good news is that you can get your Driver’s License back by filing a bankruptcy.

In 1971 the U. S. Supreme Court in the case of Perez v. Campbell stated under 11 U.S.C. 525(a) of the Bankruptcy Code, if the debt that caused the suspension of the license was discharged in a bankruptcy, then the license reinstatement could not be denied.

However, even though you may be able to get your Driver’s License back, you may still be responsible for the fine associated with the accident.  Generally speaking, the fine itself is not dischargeable in a bankruptcy since fines owed to a “governmental unit” are nondischargeable.  You will also likely be required to pay any State required reinstatement fees.   Often whether the fine itself can be discharged will depend upon whether the fine is treated as a civil or criminal matter by your state.  In New Orleans, Louisiana where I practice, we have both civil traffic tickets and criminal traffic tickets.  The following articles discuss the specific rules that apply to reinstatement of a Driver’s License in North Carolina and Kansas.

Also, debts incurred as a result death or personal injury that resulted from drunk driving or driving under the influence of a drug or other substance are not dischargeable.

When I meet with a married couple that are considering a Chapter 7 bankruptcy, one major consideration that needs to be addressed is whether or not to file for both, or only one of the spouses.

I practice in Louisiana.  Louisiana is a community property state.  This means that all the assets acquired after the marriage and all of the debts incurred after the marriage are owned and owed by both spouses equally.

The joint ownership of the debts and assets by both spouses has advantages and disadvantages to a couple:  the disadvantage is that a creditor of a Louisiana debtor can go after both the separate assets and community assets of either spouse to satisfy the debt owed to that creditor.   (There are issues of reimbursement by one spouse to another spouse for the use of their separate property to satisfy a community debt that are not important to this discussion.  Also, this discussion does not address the rights of a couple to enter into a prenuptial agreement and the effect such an agreement would potentially have on the rights of creditors).

The advantage is that either spouse can file individually in a community property state and discharge the community debts.

Why is this the case?

Because when a bankruptcy is filed you must include all of your assets and debts.  Section 541(a)(2) of the bankruptcy code includes community assets as assets of the “Estate.”

There are many practical reasons to have only one spouse file:

• The filing gives both the debtor spouse and the non-debtor spouse an automatic stay of all collection proceeding, including repossessions, as well as legal proceedings, such as foreclosures and  garnishments;
• The discharge covers both spouses; and,
• If necessary, the non-filing spouse could, if necessary, file another Chapter 7 at a later time.  This can be particularly important if the couple has additional financial issues, and less than 8 years has passed since previously filing.

There are some reasons why both spouses may want to file anyway:

• In some states that use state exemptions, the spouses may be able to get a larger homestead exemption for their house.  Some states allow each spouse to claim a homestead exemption on real estate, and some states have a larger homestead exemption for a married couple than is permitted for an individual.  This can be particularly important if the home has more equity than is permitted under state law.  (Since the Louisiana homestead exemption of $35,000.00 is a single exemption regardless of whether the debtor is an individual or a couple, this is not an issue for my clients).
• There are some Courts that have ruled that since only the community property is protected by the discharge, the creditor is still free to go after the separate property of the non-filing spouse to satisfy the community debt.
• There is debate within the legal community as to whether or not a creditor can continue to contact a non-filing spouse about a discharged debt; and,
• As BLN writer David Leibowitz pointed out in his article Can I file bankruptcy without my wife?  Can I file bankruptcy without my husband?, you will still need to include the full income of the non-filing spouse when determining income for purposes of the household means test income.

The decision of whether or not to file as an individual or a couple, as well as the decision on the right type of bankruptcy to file, should only be made after consulting with an experienced bankruptcy attorney.

When you file a Chapter 7 bankruptcy you must list all of your assets and debts.  Unsecured debts are discharged giving you what is often called a Fresh Start.

Payday Loans are a form of unsecured debt, although many people believe that these debts are secured.

In fact, since the borrower is required to turn over a post-dated check to the Payday lender, most believe that they can go to jail if they do not make good on the check or if the check bounces.  I have had potential clients that have been told that they will go to jail for failing to honor a Payday loan.

Telling someone that they will be prosecuted or go to jail is not true.  To be guilty of writing a worthless check the person writing the check must have written the check with the intention of defrauding the party receiving the check.  Since the Payday lender knowingly accepts a post dated check, the lender knows that the check is not good at the time it receive the check.

Occasionally I will have clients that want to pay back these loans.   The “logic” of wanting to pay them back is that the client feels that the Payday lender has done them a favor by lending them the money.

However Payday loans, while marketed as a loans to be used on a one-time basis, are in reality taken out by people when they are their most vulnerable and their most desperate.

The facts are as follows:

• The high interest rates (usually shown as a fee for borrowing the money)  make it difficult for borrowers to repay these loans.  I personally have seen potential clients come in with fees that equate to interest rates of 425% to 600%.  To read a detailed example of how much can end up being paid, consider reading:  “Payday Loans:  How To Borrow $300.00 And Owe $3,000.00″
• Because they are difficult to repay, many consumers end up paying additional “fees” in order to roll the loan over.  These fees can often end up being paid several times for one loan.
• Because of this, many consumers end up paying more in fees than the than the amount they originally borrowed, putting them into worse financial shape then when they started.

Be sure to tell your attorney about your Payday loans so they can be included in your bankruptcy.

A Chapter 13 Bankruptcy last a minimum of 36 months, and more frequently lasts for 60 months.

During that 36 to 60 month time frame, the Debtor will be making monthly payments, known as Plan payments to the Trustee.

So it should not come as a surprise that things can happen that can have an impact on a Debtor’s ability to pay his monthly Plan payments.

Also, in addition to payment issues, other events can happen to the individual during a Chapter 13.

As an example, what happens if a person is paying the secured debt on a vehicle and the vehicle is wrecked or has mechanical problems that make the vehicle of no further value to the individual?

Fortunately, the Bankruptcy Code permits a Chapter 13 Plan to be modified following it’s confirmation if there has been a change in circumstances.

Section 1329(a) permits a Debtor, Unsecured Creditor, or the Trustee to modify a Plan to increase or decrease payments, however, most of the time this section is used to reduce payments.

So, if an individual has a reduction in income, they can seek a modification of their Plan to reduce the payment to their creditors.

Likewise, if Debtor has a vehicle that is no longer operational, or he needs to surrender the vehicle for some other reason, then the Plan can be modified to give up the vehicle, even if the vehicle is wrecked.

The debt does not go away, but it is no longer a secured debt and will only get paid to the extent that other unsecured debt will be paid.

It should be noted that the creditors have a right to object to the modification, so the modification of a Plan is not automatic.

Two other instances where a Debtor has an absolute right to modify a Plan is when they need to purchase health insurance or in situations where the individual has been ordered to pay a Domestic Support Obligation post petition.

Modification of a Plan is only one way that a person can address financial changes in a Chapter 13 Bankruptcy.

Contact an experienced attorney to discuss your options.

One of the hardest issues for a bankruptcy attorney to deal with is the issue of the Reaffirmation Agreement.

When a person files a Chapter 7 bankruptcy he is given a rare opportunity:  To start over fresh without his debts!

This means that a debtor has the right to get rid of both his debts to unsecured creditors and secured creditors.   With the secured debt, the creditor can still seize and sell the item, most usually a car or a house, but since the debtor is no longer personally liable for the debt, the creditor is limited to the proceeds from the sale and can’t get a judgment against the debtor for any excess amount.

A reaffirmation agreement changes this.

It takes away the fresh start because the debtor, by signing the agreement, agrees to continue to be personally liable after his bankruptcy for a debt that he would have otherwise discharged.

What this means as a practical matter is that once a debtor agrees to keep paying the debt, if something happens later and he cannot continue to pay, the creditor has a right to go after the debtor personally.

There are three main reasons why this issue is one of the hardest for a bankruptcy attorney:

1. Americans are in love with their cars and will do most anything to keep the one they own;
2. People look at having to give up a house as a sign of failure; and;
3. Creditor’s know 1 and 2.

There are a number of requirements for a reaffirmation agreement to be valid:

1. It has to be enforceable under non bankruptcy law.
2. It must be made before discharge.
3. The debtor must be informed by the Court or his attorney that he has a right not to enter into the agreement, and the legal effects must be explained.
4. The debtor must have enough income to make the payments, or explain to the satisfaction of the Court what sources are available to pay the debt.
5. The obligation to pay the debt must be in the debtor’s best interest.

The debtor has 60 days to rescind, from the date the agreement was filed with the Bankruptcy Court or before the court grants the discharge, which ever is longer.

The pros and cons of signing reaffirmation agreements will be discussed on this site over the next several days.

A common concern that potential clients have is what will happen to a co-debtor if the client decides to file for bankruptcy.  Most often the issue comes up when a friend or family member has co-signed for a car for the client, and the client has gotten behind on payments.

The potential debtor is usually embarrassed that they couldn’t make the car note, and doesn’t want the friend or relative to have to pay the note.

The answer to this question depends on whether a Chapter 7 or a Chapter 13 is going to be filed.

When either a 7 or a 13 is filed, the debtor receives an automatic stay from all collection proceedings.   The automatic stay prevents creditors from continuing collection proceedings, and in particular here, will stop a creditor from taking any further action to repossess a vehicle.

For a more detailed discussion of the automatic stay, its effect, and exceptions, you might want to read:  “Wait!  Stop! I Filed Bankruptcy (again)”

Unfortunately, Chapter 7 does not give a co-debtor any protection from having to pay the debt for which he co-signed.

However, Chapter 13 does allow for a co-debtor stay.

The Bankruptcy Code recognizes that a debtor that has had someone co-sign for a loan is going to be under pressure, either real or imagined, by the friend and relatives to pay the debt.

Also, the co-debtor stay also means a creditor can’t use the relationship between the debtor and co-signer as a way to pressure the debtor to pay the debt.

The co-debtor stay remains in effect until the Chapter 13 case is closed, dismissed, or converted to Chapter 7.

The co-debtor stay can be a major consideration when deciding which type of bankruptcy is best.

Consult with an experienced bankruptcy attorney to discuss what options are best for you.

A Chapter 13 bankruptcy will normally take a minimum of 3 years and may have to continue for 5 years depending upon the income of the debtor.

Because of the length of time involved in a Chapter 13, there is always the very real possibility that the debtor may have unanticipated major expenses during the life of the bankruptcy.

It may be necessary to purchase a big ticket item such as a car or make repairs to a house.

Under these circumstances can a debtor incur new debt?

Generally speaking, incurring debt during a 13 is prohibited.  For instance you cannot use any credit cards that you may have at the time of the filing (assuming that there are any creditors that have not already cancelled the cards) , nor can you go out and get credit cards.

However,under certain circumstances you can obtain credit for a specific need, but it will be necessary to obtain permission from the court.

A motion needs to be filed with the court requesting permission to incur debt and the court will determine whether or not a loan can be obtained.

However, before considering getting into new debt, your attorney may have other solutions that can help in paying unexpected bills.

One option would be to request a suspension of plan payments for a fixed period of time.

If you are not in a full 60 month plan it may be possible to suspend the payments and extend the plan without having to increase your plan payments.

If the plan is already a 60 month plan, then it is likely that an increase in plan payments will need to occur.  Under those circumstances, it will be necessary to show the court that there are going to be additional funds available to fund the new amount.

You will want to explore all of your options with an experienced bankruptcy attorney before making any decisions.

What is cross collateralization and how can it affect your Bankruptcy?

When a loan is cross-collateralized it means that you have made an unsecured creditor into a secured creditor.

How does this happen?

When you purchase a car, it is common for the documents you sign to give the lender a security interest in the car.

 The car becomes collateral for the debt.   This type of debt is often referred to as a “collateral mortgage”.

The agreement allows the lender to hold the title to the vehicle until you pay it off. If you don’t pay it off, then the security agreement permits the lender to repossess your vehicle.

Such a provision is understood by pretty much everyone that has ever purchased a vehicle.

However, credit unions, and to a lesser degree, banks will frequently put a provision in the security agreement that allows the lender to secure any other debt that you may have with that financial institution using the vehicle as well. Very few people are aware that such a provision exists when they signed for their vehicle.

If you then go back to the credit union or bank that gave you the vehicle loan and get a credit card, a line of credit, or some other type of loan that would normally be unsecured, the vehicle will act as collateral for the credit card or line of credit.

This occurs because you have already signed an agreement when you took out the car loan agreeing that it secures any other loans that you get with that lender:  You have now created a secured debt on the credit card or other unsecured debt.

How can this type of agreement affect your bankruptcy?

When you file a Chapter 7 you can discharge you unsecured debt.

With your secured car loan you generally have two options: you can surrender the vehicle or you can reaffirm the debt and keep the vehicle.

However, when you file a Chapter 7 and you have a vehicle loan and other loans at the same credit union or bank that are cross collateralized, then it is likely that you will have to pay all of them if you want to keep your vehicle.

One solution to this problem may be to file a Chapter 13 since more options are available regarding vehicle loans in a 13, but like many things in bankruptcy, there are pros and cons that must be weighed.

Consult an experienced bankruptcy attorney to review your options.