I practice in the Washington, DC area. Lots of my clients work for federal agencies and contractors who require security clearances as a condition of their employment. The first question they ask when them come to see me is whether a bankruptcy filing will cause them problems with their security clearance. The short answer I give: No, it will not.
This causes surprise, in large measure because of the urban legends about bankruptcy that just aren’t true. But why won’t bankruptcy have a negative impact on a security clearance? The reason is simply because bankruptcy makes you less of a security risk.
What makes someone a security risk? According to the Department of Defense, “The purpose of a security clearance is to determine whether a person is able and willing to safeguard classified national security information, based on his or her loyalty, character, trustworthiness, and reliability.” “All available, reliable information about the person, past and present, favorable and unfavorable, is considered in reaching a clearance determination. When an individual’s life history shows evidence of unreliability or untrustworthiness, questions arise whether the individual can be relied on and trusted to exercise the responsibility necessary for working in a secure environment where protection of classified information is paramount.”
Under this standard, it is not the bankruptcy itself that potentially could cause a problem, but the reasons the person files for bankruptcy. For example, if you run a Ponzi scheme, or if you defraud people, or if you committed criminal acts, and file bankruptcy as a result, this could be a problem. But if your or a family member’s illness caused financial problems, or if you were out of work or had your wages cut, or if you got divorced (events that cover almost 90% of all consumer bankruptcies), these don’t impact your reliability or trustworthiness and a bankruptcy that results won’t impact your clearance.
I have represented people who work at DOD, DIA, CIA, NSA and the White House, as well as every branch of the military. I have represented people with every possible security clearance, from Confidential to Top Secret (and the other clearances that have only letters and numbers describing them). NOT ONE has told me that a bankruptcy filing had any impact whatsoever on their security clearance, their job, or their advancement. I have even had clients tell me that their security officer told them that they needed to file for bankruptcy or they would lose (or not get) their clearance! The only requirement is that you tell your security officer before you file so that they know you are not trying to hide anything. They already know that you’re in financial difficulty–bankruptcy shows that you’re addressing the problem and fixing it.
And this makes sense. Bankruptcy allows you to deal with your debt. It allows you to eliminate it, restructure it, and pay it. It enhances your reliability and trustworthiness, and makes you less of a risk that someone will offer to take care of your financial problems in exchange for your password.
So if you are worried that you’ll lose your security clearance if you file bankruptcy, don’t. It will actually help.
The Hedge 