Security Clearance and Bankruptcy

Security Clearance and Bankruptcy 

I see this question quite often, "Can I file bankruptcy and keep my security clearance?" so I'm going to address it here.

Whether or not you can file for bankruptcy and keep your security clearance or obtain security clearance after filing bankruptcy in the past depends on the following factors:

• The type of bankruptcy you filed
• The type of debt you owed
• Your financial behavior since the bankruptcy
• How old you were when you filed for bankruptcy (yes, they look at that)
• How much you owed when you filed

Why Chapter 13 Looks Better Than Chapter 7 for Those With Security Clearance

You can file and keep your position

In general, filing Chapter 13 bankruptcy reflects better on your responsibility level than filing under Chapter 7 because Chapter 13 bankruptcy requires you to repay your creditors whereas, with few exceptions, Chapter 7 lets you walk away from your debts. Because you're trying to create as responsibile a persona as possible for your periodic security clearance reviews, if you have to file bankruptcy, Chapter 13 is usually the safest route to go to keep your security clearance job.

However, if your debt load is ridiculously high and you qualify for Chapter 7, that doesn't necessarily mean that filing under Chapter 7 will cost you your security clearance. You have to weigh the pros and cons here. Is that job really worth being saddled with all that debt for another 3-5 years? If your debt load is high, you may want to go ahead and take the risk. You can always get another job, but you may not get another chance to have your debt load discharged in its entirety.

Extenuating Circumstances Behind the Bankruptcy

Your reviewers will looks at the extenuating circumstances behind your bankruptcy when making a decision about your ability to keep your security clearance. For example, if you filed for bankruptcy as a result of medical bills that got out of control (and you wouldn't be the first) when a family member fell ill, your reviewer can clearly see that your bankruptcy was not the result of a pattern of irresponsible behavior. An illness in your family, and the medical bills that come with it, isn't something you can change (military families have the great, all-encompassing Tricare so this scenario probably doesn't apply, but still...).

If, however, you filed bankruptcy as a result of credit card debts, high-interest loans and other financial products you applied for and weren't able to keep up with, the security reviewer will see that you bit off more than you could chew financially and will take that into consideration when determining whether or not to extend or terminate your security clearance.

Post-Bankruptcy Financial Behavior Affects Security Clearance

Yet another factor your security review takes into consideration is your financial behavior since the bankruptcy. Your reviewer wants to see that filing for bankruptcy taught you an important lesson about managing your finances properly. If you immediately apply for and max out three or four new credit cards after the bankruptcy discharge, that sends the message that you haven't learned anything from your struggles and irresponsibily is the precursor to treason *cue scary music here*

Take it easy with the credit cards post-bankruptcy

Your Relationship With Your Chain of Command Makes a Big Difference

I know each military branch has a different document outlining security clearance regulations and most say the same thing in a different way. What I found very interesting was that the Air Force Academy website emphasizes again and again that having a good relationship with your chain of command has a significant impact on whether filing for bankruptcy will result in your security clearance being revoked.

While that may seem every different shade of wrong, its absolutely true. Your commanding officer putting in a good word for you may be all it takes for a security reviewer to skim your file and ignore a bankruptcy. You see, the reviewer has to make a decision: Does the bankruptcy indicate you were irresponsible by getting in over your head with your creditors, or does it denote responsibly by demonstrating that you're trying to resolve your debt problems rather than ignoring them? Your commanding officer's opinion of you can make all the difference in this case.

Sometimes, Bankruptcy is Best

Filing for bankruptcy won't automatically cost you your security clearance but, if you don't get your debts under control, sooner or later those debts will.

As a rule, bankruptcy makes me cringe. The vast majority of the time the person could have gotten out of the situation another way but panicked and ran to a bankruptcy attorney who did the whole, "Stop the phones! I can save you!" routine and BOOM! a bankruptcy was slapped on the person's credit report. Sure, the credit bureaus have to remove that bankruptcy eventually, but you can't erase the fact that it happened. You filed. Its a public record. You'll be legally required to declare it on employment and loan applications, if asked, for the rest of your life.

In the case of those with security clearance, however, bankruptcy can serve as a shield standing between them and their creditors – helping them keep their security clearance and their jobs.

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How Collections Affect Security Clearance Jobs

How Collections Affect Security Clearance Jobs

For the average individual, collections are a nuisance. For the consumer with a job that requires security clearance, collections pose a threat to their financial stability. If they lose their security clearance, they will likely also lose their jobs.

As recently as 2007, 50% of all security clearance denials occured as a result of "financial considerations." In other words, "Your credit history makes you a security risk." That number applies to all branches of the military, by the way.

Do You Have to Have Good Credit to Get and Keep Security Clearance?

Good credit isn't a necessity to get and keep a job that requires you to have security clearance. What's crucial is that you do not demonstrate a state of financial need. The military wants to see that you are financially stable and not struggling with debt. If the military determines that your debt load is too high, they may just turn down your application for security clearance.

The DoD can't risk careless workers spilling secrets.

The reason for this hinges on the information you'll have access to. In the eyes of the Department of Defense, you have a much greater incentive to betray your country and sell sensitive information if you're up to your eyeballs in debt and looking for a way out. I'm guessing if "the enemy" or "the competition" would take the trouble of tracking down a likely individual and making a financial offer for sensitive information, the sum would be enough to stagger even someone who wasn't in debt. It would probably come down to greed and/or intentions rather than "Whoo-hoo! I can pay off my debt!". But the "don't be in debt" rule looks good on paper. In practice, ehhh...its flawed.

Collections Accounts Add to Your Allowed Debt Amount

There is no set figure you have to stay below in order to get and keep your security clearance. Experts estimate, however, that $3500 is the general figure to shoot for.

But what's more important that the amount of debt you carry is how you got there. For example, a reviewer will scrutinize a $500 collection account more closely than a $5000 student loan debt that you pay on time each month. Why? The collection account denotes carelessness and irresponsibility whereas the student loan account does not. Carelessness and irresponsibility are more important than the amount of debt you carry, because these factors make you a bigger security risk to your country. Thus, collections on your credit report are particularly dangerous if you're headed for a security clearance review.

Pay Off Collections Before Your Security Clearance Review

As much as I hate to tell anyone to pay off a collection agency, the simple fact of the matter is that, in a security clearance review, paid collections reflect far better on you than unpaid ones. Sure, it won't help your credit score and paying them doesn't result in them being removed from your credit report, but it reduces the debt load you carry and makes you less of a security risk. Keep in mind, however, that the very fact you had debts that fell into collections will count against you during your security clearance review. You may be asked to provide a written statement explaining the reasons behind the collections on your credit report.

If you plan to pay off collections before your security review, do so at least 60 days ahead of time. This gives the collection agencies time to update your credit reports accordingly, and for you to demand that they update your report if they don't do so within 30 days. You can choose to pay at the last minute, but if you do, make sure to get a statement from the collection agency noting that fact and noting that you have a zero balance. You can show this statement to your reviewer in lieu of an updated credit report.

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Security Clearance and Bankruptcy

How Much Do Collections Hurt Your Credit Score?

You know that collections on your credit report hurt your credit score, but how much? Probably less than you think.

How Much Collections Hurt Your Credit Score?
Collection accounts are derogatory entries on your credit report, but a collection account isn't like a bankruptcy or foreclosure, which are the financial equivalent of Monopoly's "Go directly to jail, do not pass Go, do not collect $200" card.

Here's why: Your credit's already damaged. 

When a lender charges off your delinquent debt and sells the account to a collection agency, the payments you missed and the lender's charge-off damage your credit rating. A damaged credit rating is less vulnerable to negative entries that a positive credit rating.

No one knows the exact scoring formula, but what we do know is that a negative entry hurts someone with good credit far more than someone with bad credit. Look at these two hypothetical scenarios:

Joe has a credit score of 750. Or, at least, he thinks he does. When Joe goes to apply for an auto loan, expecting to get an excellent interest rate, he's quoted a rate far higher than he thinks he deserves. After going home and pulling his credit report and FICO scores, Joe is shocked to learn that a collection agency has hit his credit report for a debt he wasn't even aware of – costing his credit score 120 points. 

Jane has had numerous debt problems in the past and can't keep up with her credit card payments. She finally defaults on the balance she owes – knowing that it will end up in collections. Jane's credit score is 550 when the credit card company finally charges off the debt. Four months later a new collection appears on her credit report, but Jane isn't too worried. The new collection only costs her 30 points – bringing her credit score down to 520. 


In Joe's case, his good credit rating caused his credit score to go into free fall from a single collection hitting his credit report while a collection hitting Jane's credit didn't have that much of an impact. The degree to which a collection hurts your credit score – and how many points you can expect to lose – is directly related to how high your credit score is when the collection agency reports the debt. The higher your are, the greater the fall. 


Estimating the Damage Collections Do to Your Credit Rating
As much as you'd like to know ahead of time how much damage a collection account will do to your credit rating, estimating the damage is just that: an estimate. Each piece of information on your credit report affects your score to a different degree. Thus, two people with the same credit score may have drastically different results should the same collection account for the same amount hit their reports. On average, with an average credit rating, an individual may suffer anywhere from 50 to 75 points of damage, but that's just a ballpark figure. As I stated before, everyone is different.

Collection Amount Affects Credit Score Damage
One thing most debtors don't realize is that the amount they owe a collection agency influences whether or not their credit scores take a nose dive once the entry hits their credit files.

Since time out of mind Fair Isaac's credit scoring model counted all collections pretty much the same way. The scoring formula didn't differentiate between a $20 collection for an unpaid library fine and a $5000 collection for a unpaid student loan. One person is clearly the greater credit risk than the other, but the system didn't reflect that.

With the release of FICO '08 in early 2009, the scoring formula now has a way of differentiating between consumers who have clear debt management problems and those who got nickel and dimed all the way to collections. If the original debt you owed was less than $100, the resulting collection account may show up on your credit report but it won't hurt your credit score.

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Collections on Your Credit Report

Collection Accounts and Your FICO Score

Credit Reporting Period vs. Statute of Limitations