So close to Tax Day, we have all had a chance to take stock of our income and debts and consider our financial fit in a faltering economy. This year more than most, there are reasons for concern. Inflation is almost certainly worse than the official numbers suggest (and the official numbers are pretty bad.) The supply chain remains broken, and car prices are sky high. We are in twin rent and housing crises, and gas prices continue to stagger. The drums of war beat ever louder as the Russian invasion of Ukraine rolls into its second month. If we are at a breaking point, you need to ask yourself how resilient your finances are. For clearance holders, a sudden downturn can mean more than a bad year. Unpaid bills can kill a livelihood.
“During security clearance background checks, debt is looked at for a variety of reasons,” says Ashley Morgan, a debt and bankruptcy attorney in northern Virginia. She explains that adjudicators want to know whether you are living outside your means. “If someone has debt that they are using to supplement their income for extravagant purchases, it makes for a higher risk situation.” If the debt is severe enough, a keeper-of-secrets is at greater risk of being compromised. Moreover, addiction and debt often go hand-in-hand.
“Financial considerations” are by far the primary reason the Department of Defense denies or revokes a clearance.
To eliminate debt, you need to get a grip on your financial affairs overall. The first step to any personal financial recovery is to build a spreadsheet of every single debt you have, the balance, the interest rate, the due date, and the payments due. While you are at it, you may as well add the customer support line for each card. Credit card rewards programs are very seductive, and applying is easier than ever before. This means you might have more credit cards than you think—many of which have annual fees.
It would be foolish to trust email reminders alone for your payment due dates. Junk mail filters, after all, can sometimes be overzealous. Once you’ve built your spreadsheet, add every due date to your calendar, set them to repeat monthly. One rule you can apply: Your calendar is a sacred space. The only things you should ever add to it are things that will happen with certainty. That meeting at 3:00 p.m. on Thursday. Your child’s volleyball game on Saturday at noon. And your bills. Nothing in this world is more certain than a credit card company noticing that you are a day late on a payment.
There is no excuse for accidentally incurring late fees. Do you really want to give a bank more money? They’re already charging you 17% interest on that coffee you bought at Starbucks last year. If you are deep in debt, on the day a bill is due, you must have more money in the bank than the minimum payment. Moreover, every month, the amount you owe should be less than the month before. This means actually looking at your credit card statements, figuring out exactly where you money is going, and cutting those expenses wherever possible. The Total Money Makeover, by Dave Ramsey, is a great book designed to help you do just that.
PAYING DOWN DEBT
Kristina Guardado, a financial coach and founder of Elite Empowerment Coaching, explains that when it comes to debt-elimination, a one-size-fits-all approach doesn’t necessarily work. “Some people are motivated and will sacrifice a lot to get rid of their debt as quickly as possible. Others may need motivation and love having quick wins. There is a debt payoff strategy for each.”
She offers four methods for paying down debt.
The Snowball Method involves paying off a debt with the lowest balance first while making minimum payments on everything else. “Once the first lowest balance is paid off you roll that payment into your next lowest balance,” she says. “This can be good for someone who needs motivation. You are getting quick wins, and building motivation to keep going!”
The Avalanche Method means paying off your debt with the highest interest rate first while making minimum payments on everything else. Pay off the highest interest rate balance, and roll that payment into your next-highest interest rate balance. She says this method is good for those with high-interest credit cards or a payday loan. The goal is to save money otherwise spent on interest.
The Highest Monthly Payment Method is to pay off your highest monthly debt payment first while making minimum payments on everything else. Pay off the bill with the highest monthly debt, and roll that payment into your next highest monthly debt payment. “This may work well for someone with a tight cash flow as they are working to get rid of their highest payment. This eventually frees up that money to start using for other goals.”
The “Debty Downer” Method means paying off whatever debt you have that gets you angry every time you see it. You pay this off first while making minimum payments on everything else. Next, re-evaluate these strategies again and find the next best one to pay. “This can work well for someone who has a debt from a divorce, medical surgery, or any other debt that stirs up bad feelings. Paying this off first allows them to put it behind them and move on with their life,” she says.
GET LOWER INTEREST RATES ON DEBT
Sometimes, high interest rates and the sheer quantity of debt can be overwhelming. As we learned last month, sometimes gas prices double seemingly overnight. Sometimes $100 spent on groceries only buys $85 worth of food. Todd Christensen, an AFCPE-accredited financial counselor and the author of Everyday Money for Everyday People, says that if debt is beginning to overwhelm you, reach out to your lender or credit card company and try to negotiate a better interest rate. This will allow more of your monthly payment to go toward the balance owed. You can also get in touch with a non-profit credit counseling agency.
“Every credit card statement contains such a recommendation for consumers having trouble with their debts,” he says. “Credit counseling agencies work with your current creditors to lower their interest rates and have you debt-free in five years or less. Because they work out new agreements with your creditors, you don’t experience the negative effects of other, more severe options.”
Beware of for-profit debt settlement companies. “They suggest that they can get you out of 50% of your debt obligation. Unfortunately, the process also leads to an even worse credit rating, endangering security clearances even more,” he says. They can also charge exorbitant fees, making your problems worse.
Debt consolidation loans and balance transfer offers can also be dangerous, because they are not debt elimination strategies. Rather, they are debt shuffles. “Too many consumers take out such loans and lines of credit to pay off their credit cards only to find that they have not addressed the reasons they got into debt in the first place. Many continue to overspend and find they have run their original credit cards back up to their limits within a year or two, effectively doubling their debt—and their financial problems,” explains Christensen.
No matter what you do, do something. “Doing nothing is not an option,” says Christensen. “Creditors have not forgotten about any debts you owe them. Many wait until a month or two before the statute of limitations runs out to seek a judgment against you in court, with which they can seek to garnish your wages.” If you end up in court, you are going to need an experienced attorney.
BANKRUPTCY IS AN OPTION
Bankruptcy should be your option of last resort—but it is an option, particularly if you have insurmountable debt. “It is better than missing payments and being delinquent,” says Ashley Morgan, who adds that she has had clients come to her law firm specifically because of concerns raised during initial security clearance investigations. “Often, we file bankruptcy—both Chapter 7 and Chapter 13—to help individuals deal with their debts and either get, or maintain, their security clearances. Bankruptcy is often seen as better than having outstanding debt that you cannot pay.”
A Chapter 7 bankruptcy usually takes three to four months. “It gets rid of a lot of debt and allows someone a quick fresh start,” she explains. Alternately, a court can offer a Chapter 13 bankruptcy, which is usually a three to five year payment plan. “It allows someone’s debts to be wrapped up into one payment and dealt with in a reasonable manner. After the payment plan is in place, often investigators just confirm payments are being made on time.”
Debt can be terrifying when money is tight, and money is getting tighter than ever. Take stock of your debts, survey your spending, lower your interest rates when possible, and get on a repayment plan. Getting your financial affairs in order is perhaps the most important thing you can do right now to preserve your security clearance and get through the economic woes to come.