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Security Clearance & Bankruptcy
How Does Filing Bankruptcy Affect a Security Clearance?
Filing for bankruptcy doesn’t automatically disqualify someone from obtaining a security clearance.  There are guidelines the Department of Defense Office of Hearings and Appeals considers when deciding whether or not to issue a top secret security clearance for someone who has declared bankruptcy, such as tax evasion, financial obligations, inability to satisfy debts, unexplained affluence, and being prone to gambling, drugs, or alcohol. However, there are mitigating facts that should be considered as well such as whether the bankruptcy was out of the person’s control, there was a good faith effort to repay debts, and if the person received counseling.
Specifically, an Administrative Judge will use the “Whole-Person Concept” where he or she must consider the totality of the conduct and circumstances available.  This includes information about the person that is both favorable and unfavorable. The Department of Defense Directive sets forth “Disqualifying Factors” and “Mitigating Factors” as outlined briefly above.  An Administrative Judge must answer the overarching question with a non-speculative conclusion; “is it consistent with national interest to grant the applicant access to classified information?”
- Guideline F (Financial Considerations): These include the failure or inability to live within one’s means and satisfy debts and financial obligations. The reason these considerations are important is affluence that cannot be explained raises security concerns. Similarly, overextended people may do something illegal to obtain money. Lack of judgment and the unwillingness to abide by rules raise questions about the reliability and trustworthiness of the person to handle classified information. 
- Concerning Activities: Inability or unwillingness to satisfy debt and/or a history of not meeting financial obligations.
- Mitigating Activities: The applicant is receiving counseling for the problem, there are clear indications the problem is being resolved or is under control, there has been a good faith effort to repay overdue creditors or resolve debts.
- Guideline E (Personal Conduct): These considerations include “questionable judgment, lack of candor, dishonesty, or unwillingness to comply with rules or regulations that can raise these questions about an individual’s reliability, trustworthiness, and ability to protect classified information.” The Judge will look especially closely at dishonest answers given during the security clearance process.
- Concerning Activities: Credible adverse information that may not be adverse under a single guideline but, taken as a whole, supports the “whole-person concept” of questionable judgment, lack of candor, and unwillingness to comply with rules and regulations.
- Mitigating Activities: The applicant has acknowledged the behavior, obtained counseling to change the behavior, taken positive steps to alleviate stressors or factors that cause the inappropriate behavior, and the behavior most likely will not recur.
- General Factors:
- The nature, extent, and seriousness of the conduct
- Frequency of the conduct
- Motivation for the conduct
- Potential pressure, coercion, exploitation, or duress
- Presence or absence of rehabilitation and other behavioral changes
- Applicant’s age and maturity at the time of the conduct
- Circumstances surrounding the conduct to include knowledgeable participation
- Burden of Proof: The government has to prove through substantial evidence that there is a rational connection between the applicant’s behavior and the potential to hold a security clearance.  Once this is established, the burden shifts to the applicant to present rebuttal evidence to explain mitigating factors sufficient to outweigh the government’s case.
Case Where a Security Clearance was DENIED:
The applicant was a 51 year old Graphic Artist employed by a defense contractor for 26 years. She was financially overextended and collected debts over $35,000. As the primary earner for her family (which included a father and twin daughters) she used credit cards to buy things she could not afford. She had delinquent debts, borrowed money from her 401(K) to cover gas costs for her commute, and then filed for Chapter 13 when debts became delinquent. She also paid $371 a month to the bankruptcy trustee to go towards this delinquent debt, completed credit counseling, and began to shop at discount grocery stores.
However, the applicant also violated her company’s labor reporting policies and was placed on a year of probation. She claimed child care exemptions that were questionable and committed time card fraud at her work. The government agency revoked her program access due to this time card fraud and admitted tax fraud. The Judge took all the factors listed above into the “Whole-Person Concept” and found she engaged in rule violation and poor personal conduct, poor judgment, unreliability, and untrustworthiness. She also did not have enough proof of rehabilitation. She was told to re-apply next year when she could prove she changed, vastly improved and rehabilitated her personal conduct to tip the balance in her favor.
Case Where a Security Clearance was GRANTED:
The applicant was a 41 year old employee of a defense contractor that is currently a non-destructive test inspector going to full time college. He had several children and a few divorces as well as a current wife. He became financially delinquent in 2005 and denied having spending problems; instead, his financial problems were from being laid off, from divorce, an old farm house purchased without a home inspection that was in bad condition, and from work that was primarily commission-based. Five accounts were delinquent for a total of $168,476 ($162,000 of which was attributed to unpaid loan balance on his mortgage and the rest from medical and credit card debt) and one was going into foreclosure. The applicant mitigated this by reducing his child support, discontinuing smoking, cancelling cable TV, discontinuing extracurricular sports, postponing the purchase of a new car, rejecting new credit cards, and making dietary changes.
The Judge examined the applicant under the “Whole Person Concept” subject to Guidelines F and E of the Department of Defense Directive as outlined above and determined that he developed a “meaningful track record” of debt reduction and elimination. He tried hard to resolve any outstanding bankruptcy accounts and the judge found that his financial failings were beyond his control (e.g. being laid off, divorce) and the failings were unlikely to recur because of his clean financial slate.