Keeping a Security Clearance after Bankruptcy


Financially-distressed workers at Camp Robinson, Fort Chaffee, and the other military installations in Arkansas, as well as the private-sector workers that support these and other DoD facilities, often put off filing bankruptcy because of the persistent myth that such a move will trigger the revocation of their security clearances, or at least trigger unfavorable scrutiny.

Under federal law, it is illegal to discriminate based on bankruptcy filing, and that law applies to most employment-related decisions. However, it is not illegal for employment-related decisions to be based on a person’s financial condition, if there is a relationship between the decision and the financial situation.

For almost the past quarter-century, DoD Directive 5220.6 has been the governing law in this area, and it has some rather surprising things to say about the relationship between bankruptcy filing and security clearance revocation. As a matter of fact, a person who does not file bankruptcy when facing financial problems is probably more at-risk for adverse action than a person who does file.

Foundational Principles

Directive 5220.6 deals with thirteen different situations that the government considers to be potential security concerns; Guideline F pertains to “Financial Concerns.” It is interesting, to say the least, that the DoD considers sexual misconduct, foreign preference, and three other scenarios to be worse than financial problems. In fact, by comparison, financial concerns are alongside alcohol consumption and personal integrity.

Each guideline sets forth the policy concerns, specific examples of qualified misconduct, and possible mitigating circumstances. For example, Guideline A discusses allegiance to the United States, and concerns in this area certainly may cause any reasonable person to think that a security clearance grant may be a mistake. Essentially, membership in an organization with known ties to terrorism, or even association with an organization that sympathizes with such aims, is cause for concern. There are mitigating circumstances as well; for example, a person might only be involved in the charitable or humanitarian aspects of an organization with terrorist leanings or the person may honestly not know about the group’s political affiliation.

If a new or renewal application raises any red flags, there is a hearing. At such hearing, the officer may approve the application in full, deny it in full, or approve a “secret” security clearance but not a “top secret” one.

Financial Concerns

The concerns noted in E2.A6.1.1 are very legitimate ones. The DoD is worried that unexplained affluence may be “linked to proceeds from financially profitable criminal acts,” and that individuals facing debt problems may feel pressure to commit unlawful acts – such as selling secrets – in order to raise funds.

The affluence portion does not really apply to bankruptcy cases. And, by filing a voluntary petition, the holders (or hopeful holders) demonstrate that they are dealing with their debt problems in a legal way that is protected under federal law. So, it can be argued that Guideline F does not really pertain to bankruptcy cases.

However, moving forward, there are four specific examples that may be germane to consumer bankruptcy filings:

  • History of Unmet Obligations: Statistically, most people do not file bankruptcy because their expenses consistently exceed their incomes. Rather, one-time financial disasters, like a job loss or illness, trigger most filings.
  • Illegal or Deceptive Practices: Nearly all consumer bankruptcy debtors were overwhelmed by financial circumstances that were largely beyond their control; very few of them have any issues relating to things like “embezzlement, employee theft, check fraud, [or] income tax evasion.”
  • Behavior-Related Financial Problems: Similarly, almost no one files bankruptcy because of “gambling, drug abuse, alcoholism, or other issues of security concern.”
  • Unwillingness or Inability to Repay Debts: Debtors may be unable to pay their debts, at least according to the draconian terms the creditors propose, but they are almost never unwilling to pay them.

Essentially, if the debtor can convince the hearing officer that the financial problems which led to the filing were of the one-off and hard-luck variety, and this is nearly always the case, there is essentially no cause for concern.

While almost none of the examples apply to bankruptcy, almost all of the mitigating circumstances weigh in the debtor’s favor.

  • Isolated Incident: As mentioned earlier, most people file bankruptcy because of a financially traumatic event that had a snowball effect.
  • Not Recent: As a rule of thumb, most people file bankruptcy at least a year or so after the financial disaster, because most folks see bankruptcy as a last resort. Although the term is not defined, most people would not consider events that happened a year or more ago to be “recent.”
  • Uncontrollable Forces: This is a big one, because the four examples in the DoD’s list (“loss of employment, a business downturn, unexpected medical emergency, or a death, divorce or separation”) almost exactly mirror the reasons that people file bankruptcy.
  • Debt Counselling: All debtors go through at least two rounds of debt counseling, and most visited with Consumer Credit Counselling Service, or a similar organization, before they filed.
  • Situation is Improving: Filing a bankruptcy petition that will ultimately result in the discharge or repayment of most all consumer debts is most certainly a “clear indication[] that the problem is being resolved or is under control.”
  • Good Faith Effort: Similarly, filing a voluntary petition is sometimes the only way to “resolve” debts which, quite simply, the debtor cannot possibly afford to repay.

Procedures vary by jurisdiction, but in most cases, these matters are handled on an informal basis and there is no need for a full adversarial hearing.

A bankruptcy filing may be the best way to save a security clearance. For a free consultation, contact an experienced bankruptcy attorney in Little Rock from Niblock & Associates. After-hours appointments are available.

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