I am often asked which type of bankruptcy – Chapter 7 or Chapter 13 – a security clearance holder should declare. The obvious answer is “ideally neither.” Bankruptcy in general is viewed by the government as a symptom of larger financial problems, the kind that security clearance holders would do well to avoid.
But sometimes life happens. It could be a catastrophic illness, an accident, a market downturn, or a job loss that leads a clearance holder to the financial precipice. Certainly, none of those situations can fairly be considered the clearance holder’s fault. Sometimes bankruptcy is the only viable answer.
In such a scenario, the debts which give rise to the bankruptcy are actually the security concern; the bankruptcy itself is a mitigating condition (despite what some federal agencies attempt to claim). It is a nuanced distinction, but the idea is that federal security officials care about your financial problems because they arguably increase your propensity for bribery or other illegal conduct, and because they are viewed as a reflection on your ability and willingness to comply with rules (in this case, regarding paying your debts; in others, perhaps regarding security regulations). Resolving the debts through a legally-sanctioned means like bankruptcy mitigates the first issue and shows that you are working within societally-accepted norms on the second.
The ultimate decision about which type of bankruptcy to file belongs to the clearance holder and his or her bankruptcy attorney. There are other considerations that a bankruptcy attorney can advise you on and which are outside the scope of this article. Yet the impact of the decision on your security clearance (and thus your career) should always be part of that equation. In evaluating your options, understand that timing is perhaps the most critical component.
CHAPTER 7 bankruptcy
A Chapter 7 bankruptcy can be great in that it allows you to effectively wash your hands of all included debts the moment a bankruptcy court judge signs off on the Discharge Order. For a debtor, there is nothing more attractive than watching old debts disappear in the rear-view mirror. The problem is that federal security officials will not consider debts “resolved” within the meaning of the Adjudicative Guidelines until the court has actually discharged them. In many cases, a Statement of Reasons (SOR) will issue based on underlying debts just around the same time that the clearance holder is finally moving to file his or her initial petition. The time from initial petition to final discharge varies by judicial district, but expect it to take a minimum of several months. The delay is often significantly longer than the time a security clearance holder is granted to respond to an SOR; but, if you know the discharge is imminent, there are tactics that sometimes work to extend the response deadline accordingly. One of the easiest is to request your investigative file and ask that the SOR response deadline be tolled pending receipt. Agency FOIA offices are typically so backlogged that you can buy yourself a few months of time.
CHAPTER 13 bankruptcy
In a Chapter 13 scenario, the debtor restructures his or her debt with the assistance of the court – ultimately making payments to a court-appointed trustee in an agreed-upon amount for an agreed-upon time. In other words, you aren’t walking away from the debts like in a Chapter 7, you’re paying them back on more agreeable terms.
From an optics standpoint, this is ideal. After all, holding a security clearance is a privilege and is fundamentally premised on the idea that the government considers you responsible and trustworthy. Here again, though, timing can be an issue. Most agencies I have encountered are a bit more willing to entertain a Chapter 13 case in mitigation pre-discharge than they are a Chapter 7 case. This is likely because they know that trustee payments are forthcoming and the bankruptcy court has already vetted your finances to ensure that the size of the trustee payment will be manageable; conversely, Chapter 7 cases fail for a variety of legal or technical reasons. Unfortunately, the down-side to Chapter 13 cases is that the government will want to see a reasonable track record of the clearance holder actually making his or her trustee payments. To be safe, I suggest a minimum of six months, but more ideally a year with no missed payments. If an SOR issues too early, it is extremely difficult to establish a sufficient track record of trustee payment compliance before a final decision is rendered in the security case.
A FINAL CONSIDERATION
Regardless of which form of bankruptcy you decide to file, you still need to establish a track record of living within your means post-bankruptcy in order to have a good shot at winning your security clearance case. That’s not likely to happen if the bankruptcy discharge occurred within the last few months, so be sure to ask for extensions of the SOR response deadline, prepare a budget, and avoid accruing any new delinquent debt.
This article is intended as general information only and should not be construed as legal advice. Consult an attorney regarding your specific situation.
