Practicing bankruptcy law in the greater Washington, DC area, we often get this question from nervous government employees and defense contractors: “If I file bankruptcy, will I lose my security clearance?”
The answer is: It’s not the bankruptcy itself that is the problem. It’s the underlying circumstances leading to the bankruptcy that is the determining factor.
Think about it. If you got a very serious illness and racked up a million dollars in medical bills you could not pay, and needed bankruptcy relief to stop the collection calls, lawsuits and garnishments, does the bankruptcy — in any way — reflect upon you personally as a security risk? Was the illness your fault? Is it evidence of a personality defect that would make it more likely you would breach security? I think you know the answer.
Where the circumstances leading to the bankruptcy were financial irresponsibility, then that’s another matter. But then, the late charges, delinquencies, high credit balances, judgments, tax liens, etc. would already exist on your credit report. If anything, the bankruptcy would actually show you acting responsibility by exercising your legal right to “wipe the slate clean” and get the “fresh start” the law allows.
The US Air Force Academy’s website discusses this issue and provides some interesting guidance: (The highlighted text is mine.)
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.
Call us and make an appointment. We’ll analyze your situation, and discuss all options to address your problem in person.