Obstacles To Bankruptcy: Security Clearances

Some distressed debtors who work at one of the many military bases in Illinois or Indiana, or at one of the many private companies that support these installations, hesitate to file bankruptcy because they are afraid that a voluntary petition will mean the revocation of their security clearance.

But it is illegal to take any adverse action against any individual based solely on a bankruptcy filing. Moreover, the DoD cannot unilaterally take such action. Instead, the security clearance holder must receive actual notice of the proceedings and have an opportunity to present a defense. Finally, according to DoD Directive 5220.6, a Chapter 7 or Chapter 13 petition may actually be the only way to save a security clearance that’s already in jeopardy.

Likely Considerations

As an area of concern, financial considerations are rather far down the list. They are well below items like foreign influence and even sexual misconduct. In other words, individuals who have in-laws who work at foreign consulates or those with disturbing relationship histories are far more likely to suffer adverse action than those with debt problems. The specific concerns are:

History of Unmet Obligations: Even if the debtors have multiple unpaid accounts on their credit reports, which is not always the case, such credit history is usually related to one financial storm, such as a job loss, that had a snowball effect.
Illegal or Deceptive Practices: Persons with issues such as “embezzlement, employee theft, check fraud, income tax evasion, expense account fraud, filing deceptive loan statements, and other intentional financial breaches of trust” hardly ever file bankruptcy, mostly because such obligations are often not dischargeable.
Financial Problems Tied to Security Concerns: Similarly, almost no one files bankruptcy due to “gambling, drug abuse, alcoholism, or other issues of security concern.”

So, most of the listed concerns do not apply to consumer bankruptcy, a fact that carries considerable weight in any adverse action proceedings, such as an attempt to downgrade or revoke a security clearance.

Possible Defenses

The opposite is true of the listed mitigating circumstances, because nearly all of them apply to those who seek consumer bankruptcy protection.

Isolated Incident: The same one time storm/snowball effect argument discussed above applies here as well.
Uncontrollable Circumstances: Just as people cannot control the weather, people also have either no control, or very limited control, over “loss of employment, a business downturn, unexpected medical emergency, or a death, divorce or separation.” All these things prompt many bankruptcy filings, and they are all explicitly listed in E2.A6.1.3.3.
Good Faith Resolution Effort: A Chapter 13 petition certainly qualifies as a good faith effort to “repay overdue creditors,” and a Chapter 7 petition is often the only alternative available to “otherwise resolve debts.”

Another mitigating circumstance — “The person has received or is receiving counseling for the problem and there are clear indications that the problem is being resolved or is under control” — also applies to all consumer bankruptcy petitions.

Count On Experienced Attorneys

Bankruptcy petitioners have little to fear in the way of security clearance revocation. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Resource:

esd.whs.mil/Portals/54/Documents/DD/issuances/dodd/522006p.pdf