A common question I receive from military clients, and clients working in security-sensitive areas, is whether filing for bankruptcy will affect their security clearance. The short answer is that bankruptcy does not automatically disqualify someone from having a security clearance. In fact, in many cases I’ve handled, my client was required to file for bankruptcy in order to retain the security clearance. The reason for this is that bankruptcy wipes out almost all debt. This removes the concern that the person, having too much debt, may engage in illegal activities in order to generate funds to pay the debt. There are, however, multiple factors that affect a security clearance. Below I discuss these factors, and specifically how the “financial considerations” factor impacts and is impacted by the filing of a bankruptcy.
Factors that Determine Security Clearance Decisions
All federal agencies follow established guidelines to determine whether someone qualifies for a security clearance. The primary guidelines are called Adjudicative Guidelines for Determining Eligibility for Access to Classified Information (32 CFR Part 147), and set out thirteen factors to be considered. These are:
(1) Allegiance to the United States
(2) Foreign Influence
(3) Foreign Preference
(4) Sexual Behavior
(5) Personal Conduct
(6) Financial Considerations
(7) Alcohol Consumption
(8) Drug Involvement
(9) Psychological Conditions
(10) Criminal Conduct
(11) Handling Protected Information
(12) Outside Activities
(13) Use of Information Technology Systems
The evaluation process requires the careful weighing of all these factors. In other words, no one factor is necessarily decisive. A single factor could be decisive if the negative conduct is serious enough. But, on the other hand, multiple small infractions could also cause denial of security clearance. Where unfavorable conduct is found, the agency making the decision must determine its relevance based on: (a) the nature, extent, and seriousness of the conduct; (b) the circumstances surrounding the conduct, to include knowledgeable participation; (c) the frequency and recency of the conduct; (d) the individual’s age and maturity at the time of the conduct; (e) the extent to which participation is voluntary; (f) the presence or absence of rehabilitation and other permanent behavioral changes; (g) the motivation for the conduct; (h) the potential for pressure, coercion, exploitation, or duress; and (i) the likelihood of continuation or recurrence.
When it comes to bankruptcy, the primary factor that will be affected is Financial Considerations. We will look at that next.
The “Financial Considerations” Factor in Security Clearance Decisions
The purpose of the Financial Considerations factor in evaluating a security clearance is to weed out individuals who lack the self-control and judgment to be trusted with classified information. The intent is also to avoid the risk of someone who is financially overextended engaging in illegal acts to generate funds. Potentially disqualifying conditions include: inability or unwillingness to satisfy debt, indebtedness caused by frivolous or irresponsible spending, history of not meeting financial obligations, deceptive or illegal practices like theft or embezzlement, failure to file required tax returns, and financial problems linked to addiction.
However, it is important to note that there are a number of mitigating conditions that are considered, including: whether the events happened long ago or were infrequent, whether the financial problems were largely outside the person’s control (such as loss of employment, medical problems, divorce, etc.), whether the person initiated good faith efforts to repay creditors or otherwise resolve the debt, and whether the debt can be reasonably disputed.
How Bankruptcy Applies to Security Clearance Decisions
Bankruptcy is a legal process authorized by the United States Constitution and federal law. Because of this, it is considered a good faith effort to deal with debt and to resolve financial problems. In other words, in and of itself, bankruptcy is a mitigating condition under the Financial Considerations factor.
How Will Bankruptcy Affect My Security Clearance?
Bankruptcy is just one factor in determining eligibility for security clearance. By itself, bankruptcy will neither disqualify you from getting a security clearance, nor make you eligible for it. What is more important is how the financial problems came about, whether they are recurring, and how they have been handled. For example, if the debt causing the bankruptcy resulted from medical bills or a divorce, it is much less likely to disqualify you from getting a security clearance. On the other hand, if the debt was caused by gambling or careless spending, then that fact itself may disqualify you from getting a security clearance, whether or not you file for bankruptcy. Similarly, repeat bankruptcies (that are not a result of unforeseen events like health problems, divorce, or loss of employment) can be disqualifying, because filing for bankruptcy repeatedly can indicate inability to manage your finances.
What Should I Do If I Have Debt and Need to Apply for a Security Clearance?
The most important thing is to be honest and fully disclose your debt. Remember, Financial Considerations is only one factor in determining your eligibility for a security clearance. Another factor is Personal Conduct, and under this factor, deliberate omission or concealment of relevant facts is likely to disqualify you from getting a security clearance. In other words, you could be disqualified from getting a security clearance by failing to disclose your debt, even if having the debt would not itself disqualify you. Therefore, when filling out any personnel security questionnaire (such as the SF86 form), make sure to truthfully and accurately disclose your financial condition.
In addition, if you intend to file for bankruptcy, make sure to let your facility security officer know before you file, so as not to make it appear like you are hiding anything. In fact, if you have concerns that your debt will affect your security clearance, it is a good idea to communicate about this with your security officer. The security officer may actually end up telling you that you need to file for bankruptcy to resolve your debt. See our Bankruptcy Overview to learn about the different bankruptcy options.
To learn more about properly timing your bankruptcy, read When Should You File for Bankruptcy?
To learn about common bankruptcy mistakes, read 7 Mistakes to Avoid When Filing for Bankruptcy in Arizona.
For a discussion of debts that are not discharged, read Debts not discharged in Chapter 7 Bankruptcy.
To learn about managing your debt without bankruptcy, read 4 Steps to Avoiding Bankruptcy in Arizona.
Bankruptcy does not automatically disqualify someone from having a security clearance. For those with significant debt, bankruptcy may actually be a way to retain the security clearance. The reason for this is that bankruptcy wipes out almost all debt. This removes the concern that the person, having too much debt, may engage in illegal activities in order to generate funds to pay the debt.