Financial factors are one of several types of issues that can affect security clearance reviews. But financial factors consistently outpace all other issues combined.

Financial factors and your security clearance

The federal government examines each security clearance applicant on a case-by-case basis. Guideline F (Financial Considerations) of the DoD’s clearance guidelines lists some of the financial circumstances that can be the basis for denial of a security clearance. Inability or unwillingness to satisfy debts, irresponsible spending, fraud, tax evasion, gambling, and unexplained affluence are all red flags.

Bankruptcy is not one of the factors listed by the DoD.

Bankruptcy can also be a red flag, but only if the reason for the bankruptcy was one of the other financial factors listed above. In other words, if irresponsible spending led to the bankruptcy, then the bankruptcy is not a problem. The spending is the problem.

Many debts or large unpaid debts can indicate financial irresponsibility. The government wants to know you are not a security risk. That’s where bankruptcy comes in.

How bankruptcy could help you keep your security clearance

Filing bankruptcy is often the most responsible way to deal with financial problems. Conversely, not dealing with outstanding debt is irresponsible. Guideline F also explores several Conditions That Could Mitigate Security Concerns:

• Behavior from long in the past, or infrequent behavior
• Conditions beyond the applicant’s control, such as medical emergency, business downturn, or divorce
• Good-faith effort to repay or otherwise resolve debts

Seeing a bankruptcy attorney about filing bankruptcy would definitely qualify under this last factor. Filing bankruptcy is a good-faith effort to resolve your debts. Bankruptcy could help mitigate the security concerns arising from financial factors under consideration during your security clearance review.

Bankruptcy is a good-faith effort to resolve debts

Ohio bankruptcy lawyer Michael Warren frequently resolves security clearance concerns through bankruptcy. About 30 miles from Warren’s office, the Department of Energy oversees the decommissioning of a former uranium enrichment site, where hundreds of workers are employed by dozens of companies. Most of these workers require security clearances.

Part of DOE’s mission is to make sure that none of those workers are under financial pressure that might make them do something desperate like sell sensitive information to another country. So DOE reviews each worker’s financials to see who might be a threat.

When DOE finds a worker in financial distress, they don’t fire them. Instead, DOE refers them to me to file bankruptcy and get out of financial distress. Bankruptcy has allowed those workers to keep their jobs and has allowed the DOE to keep its valuable work going forward. It’s great to see a government agency embrace the bankruptcy remedy.

Michael Warren,
The Warren Law Firm

Bankruptcy may affect the status of your security clearance, but the effect is not automatically negative. The outcome of your reinvestigation depends on the circumstances that led to your bankruptcy.

More important, however, are 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 instead by financial irresponsibility.

Talk to a bankruptcy attorney if you are up for reinvestigation

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 or number of your outstanding debts.

By the same token, using a government-approved means of dealing with your debts indicates financial responsibility. Eliminating your debts through bankruptcy makes 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.

If financial considerations threaten your security clearance, talk to a bankruptcy attorney familiar with these issues. If bankruptcy could help you keep your security clearance, you owe it to yourself to explore that option.

The Financial Factors That Affect a Security Clearance

The federal government grants a security clearance to allow an individual access to classified information. A security clearance is a privilege. Moral issues, including personal trustworthiness, strongly influence whether an applicant will be granted a clearance.

Many factors affect security clearance approval, including personal conduct, criminal conduct, history of alcohol or drug abuse, personality disorders, and ties with foreign individuals and countries.

Financial issues, however, are the number one reason that security clearances are denied. The federal regulations Determining Eligibility for Access to Classified Information include Financial Considerations, contained in Guideline F:

Failure or inability to live within one’s means, satisfy debts, and meet financial obligations may indicate poor self-control, lack of judgment, or unwillingness to abide by rules and regulations, all of which can raise questions about an individual’s reliability, trustworthiness and ability to protect classified information.

See 32 CFR Part 154, Appendix H. Under Guideline F, outstanding debts, bankruptcy, and foreclosure are all factors in the review process.

In other words, employees with security clearances must live within their means and pay off debts in a timely manner. To do otherwise raises concerns about judgment, self-control, and could possibly render the employee susceptible to bribery or blackmail. The security review process is designed to discern an individual’s patterns of behavior, financial and otherwise.

So Will a Foreclosure Hurt Your Security Clearance?

If you made a bad investment and lost a property to foreclosure, you must take proactive steps to avoid losing your security clearance. The review officer will closely scrutinize the circumstances surrounding the foreclosure.

If it appears that you pursued a “strategic default” or delayed the foreclosure without cause, then the foreclosure may weigh more heavily against you. On the other hand, efforts to resolve the issue by deed-in-lieu of foreclosure or short sale demonstrate that you were proactive in attempting to move the property back to the bank.

Your security clearance will also be less impacted by a foreclosure if you took steps to deal with the lender in a serious and forthright manner. Obviously, obtaining a mortgage modification and retaining the property is far preferable to foreclosure during the clearance review process.

Foreclosure is often caused by unfortunate personal circumstances that are out of our control: illness, divorce, unemployment. The circumstances leading up to the foreclosure are directly relevant to your review. Supervisors and review officers consider not only the conditions leading to the foreclosure, but also whether they were out of your control. They will also examine what tangible actions you took to prevent or mitigate the foreclosure, and how long it took for the foreclosure to be resolved.

Be Up-Front and Self-Report

Be honest and up-front about your foreclosure or you will lose your security clearance. You have an affirmative obligation to self-report the foreclosure. Do not wait for your commanding officer or contracting supervisor to confront you about it. Have the hard talk. Establish your willingness to cooperate in your clearance review process. Do not attempt to minimize the government’s concerns about the foreclosure.

You should also seek the advice of an attorney. Do not assume that you can simply explain away a foreclosure at review. Consulting an attorney is also considered a mitigating factor in whether you took steps to address the foreclosure.

Of course, be sure to keep all documents relating to the foreclosure, including correspondence, court pleadings, receipts, statements, and proof of payment.

Bankruptcy Can Mitigate Foreclosure in Security Clearance Reviews

Filing for bankruptcy actually demonstrates that you are taking responsibility for previous decisions. You are handling your business, and you are taking corrective action. Bankruptcy is better than simply allowing your situation to continue to get worse. Bankruptcy, however, is not a one-size-fits-all solution. If you are facing foreclosure and concerned about its impact on your security clearance, you should discuss your options with an experienced local bankruptcy attorney.

The security clearance review process often views bankruptcy as preferable to outstanding debts because a bankruptcy filing actually addresses the debts. Security reviews consider unaddressed debts to be actual security risks. Foreclosure deficiencies are outstanding debts. Open mortgages in default signal financial risk. Bankruptcy addresses both of these circumstances.

Chapter 13 bankruptcy allows a homeowner who wishes to keep the home to avoid foreclosure altogether. Chapter 13 entails a mortgage arrearage repayment plan spread out over five years. Alternatively, Chapter 7 discharges the balance on a mortgage to prevent the mortgage company from obtaining a deficiency judgment.

Guideline F and security clearance

With any security clearance, the federal government examines each applicant on a case-by-case basis. Guideline F of DOD’s Guidelines for Determining Eligibility For Access to Classified Information. The guideline lists several conditions that could raise a security concern:

• Inability or unwillingness to satisfy debts
• Frivolous or irresponsible spending
• Deceptive or illegal financial practices
• Failure to file tax returns
• Unexplained affluence
• Compulsive gambling

Note that bankruptcy is not one of the factors for which one can be denied a security clearance. 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.

Will filing for bankruptcy affect my security clearance?

For most military members, the filing of a bankruptcy will not impact their jobs, clearance, or job trajectory. Of course, you must honestly disclose your circumstances with your commanding officer. Bankruptcy is available to both active and reservists, as well as contractors to the federal government. 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.

Talk to a bankruptcy attorney if you can’t pay your bills

If you find yourself wondering, “Will filing for bankruptcy affect my security clearance?” then talk to a bankruptcy attorney. Most of my clients are good people with good jobs who just want to get a fresh start. Eliminating your debts through bankruptcy makes 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 in Virginia, Maryland or D.C., call (202) 448-5136 for a free consultation.