Bankruptcy and Foreclosures: Impact on Federal Security Clearance

Bankruptcy on its own cannot be the reason for a former debtor being refused employment at a federal agency.  It is a part of the Federal Bankruptcy law (FBL), section 525.  However, a former debtor can be declined employment at a federal agency because of a history of financial troubles that suggests that the candidate would be too much of a risk.  The United States State Department has Adjudicative Guidelines for Determining Eligibility for Access to Classified Information as a document of guidelines to all federal agencies, including military services.  In these guidelines there is a specific section on finances, Guideline F “Financial Considerations”.  In this section there is a subsection, #19 that lists nine stated conditions that would be considered at a higher risk:

  • unwillingness or inability to satisfy debts;
  • debt caused by frivolous or irresponsible spending
    • the absence of any evidence of willingness or intent to pay the debt
    • the absence of intent to establish a realistic plan to pay the debt;
  • a history of being in arrears in financial obligations;
  • deceptive or illegal financial practices such as
    • embezzlement, employee theft, check fraud, income tax evasion, expense account fraud, filing deceptive loan statements, and other intentional financial breaches of trust;
  • spending consistently beyond one’s means, indicated by excessive indebtedness, negative cash flow that is significant, debt-to-income ratio that is high, and/or other financial analysis;
  • financial problems linked to drug abuse, alcoholism, gambling problems, all issues of security concern;
  • delinquent Federal, state, or local income tax returns as required or filing fraudulent returns;
  • a lifestyle or standard of living above reasonable means, increase in net worth, or money transfers that cannot be explained by subject’s known legal sources of income;
  • addictive, compulsive gambling; unsuccessful attempt to stop gambling, “chasing losses” – increasing bets and or returning another day to recoup previous losses, hiding gambling losses, borrowing money to be able to gamble or to pay gambling debts, gambling causing family problems or other personal problems.

This same guideline document had a subsequent section that listed potential reasons for financial difficulties:

  • behavior occurred so long ago, was so infrequent, or occurred because of reasons that it is not likely to happen again and does not impact the individual’s current reliability, ability to be trusted, or good judgment;
  • conditions that resulted in the financial problem were essentially beyond the person’s control, such as  lost job,  business failure, unexpected medical emergency, or a death, divorce or separation, yet the individual acted properly under the situations;
  • person has been or is receiving counseling for any problems and or clear indications that the problem is being resolved or well under control;
  • individual has begun or tried a good-faith effort to repay arrears or resolve debts;
  • individual has a very strong reason to dispute the correctness of any past-due debt that was the cause of the problem and has documented proof as objective evidence as the basis of the dispute or provides sufficient evidence of actions needed to resolve the issue;
  • affluence proven to be from a legal source of income;

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