Will I Lose My Security Clearance if I File for Bankruptcy?

This question is common among members of the Armed Forces or Federal employees and can often cause hesitation when making the decision of whether or not to file bankruptcy.  While each situation is different, the answer in most cases is no.  The reason for this is simple:  when someone is in a difficult financial situation, they are more likely to make a poor decision or accept a bribe in order to remedy the situation.

However, the United States Air Force Academy Legal Office has this to say about bankruptcy:

“The status of your security clearance can be affected, but it is not automatic.  The outcome depends on the circumstances that led up to the bankruptcy and a number of other factors, such as your job performance and relationship with your chain of command.  The security section will weigh whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility.  The security section may also consider the recommendations and comments of your chain of command and co-workers.  This is an issue that can be argued both ways, so as a practical matter your security clearance probably should not be a significant factor in making your decision about whether to file bankruptcy.  The amount of your unpaid debts, by itself, may jeopardize your clearance, even if you don’t file bankruptcy.  In that sense, not filing for bankruptcy may make you more of a security risk due to the size of your outstanding debts.  By the same token, using a government approved means of dealing with your debts may actually be viewed as an indication of financial responsibility.  Eliminating your debts through bankruptcy may make you less of a security risk.  There is no hard and fast answer there, with one exception: It never hurts to have a good reputation with your co-workers and your chain of command.”

In our Doral office, we have had several clients from the Metro Dade Police Department and the US Southern Military Command (SOUTHCOM).  Often, it was a letter about a five- year security review that finally kicked them into action.  Their bankruptcies helped them maintain their security clearance.

Can creditors file a judgment and have my disability wages garnished?

How Disability Income Can Affect your Bankruptcy Filing

If you are receiving disability income, regardless of whether the income is from private insurance or social security, Florida has a statute that keeps this income safe from creditors.  This means that most creditors cannot garnish your disability wages because there IS an exception—the IRS.  If you owe back taxes, the IRS can indeed garnish your disability wages, within reason.  However, other than the IRS, creditors cannot garnish your disability wages attempting to recoup money you owe them.

Because of this statute, many people think that their disability income will not be a factor when filing for bankruptcy.  After all, if the wages can’t be touched by creditors, the bankruptcy court must ignore them, right?

Unfortunately, it’s a little more complicated than that.  If you receive disability income and you decide to file for bankruptcy, that disability income will be considered when your bankruptcy attorney conducts a means test analysis.  If your disability income is significant because of private disability insurance, your attorney might suggest that you avoid filing bankruptcy and pay back your debts with the disability income you receive. 

“But wait, I thought disability proceeds were exempt!”

This is where many people become confused regarding the bankruptcy code in Florida.  Yes, disability proceeds are exempt from judgments against you but the court will still consider disability proceeds for the purposes of the means test analysis.  For example, if you were a highly-paid executive who receives $25,000 per month in disability insurance from a private disability policy, the court will likely look at this as significant income to repay your debts rather than granting you discharge of them in bankruptcy. 

Is it true that my credit takes a bigger hit if I file for bankruptcy than if I have to undergo a foreclosure?

Common Myths Related to Bankruptcy, Modification, and Foreclosure

The processes surrounding bankruptcy, loan modification and foreclosure in Miami are often complicated, resulting in several misunderstandings about how these processes work and which one you should pursue if you are facing distressing financial situations.  These common myths make it difficult to make the right decision for your financial future, so dispelling them and learning the truth about which process would work in your favor if you are considering bankruptcy in Florida is an important step to getting back on track with your life and financial goals.

Myth #1 – Loan modification is encouraged by the federal government and therefore anyone can easily get it to reduce the principal amount that’s owed on their home.

Wrong.

Less than 30% of the homeowners who apply for loan modifications are granted them.  Additionally, it’s not an easy process and can take many months to complete and there is no guarantee that the lender will reduce the principal amount on the mortgage.  You may have gone through the whole process merely to have your loan extended to 40 years and the interest rate temporarily reduced, not getting you any closer to paying off your home.

Myth #2 – If I apply for a modification, my house won’t go into foreclosure and my missed payments will be waived.

Wrong.

If the foreclosure process has already been started on your home, or is close to being started, applying for a loan modification will not stop this process.  At best, it might slow it down or postpone the sale date slightly, but there’s no guarantee.  Also, a loan modification will not waive your missed payments.  Most lenders simply add these missed payments on to the end of your loan terms. 

Myth #3 – My credit takes a bigger hit if I file for bankruptcy than if I have to undergo a foreclosure. 

Wrong.

Many people find that their credit score actually improves after bankruptcy, especially if they’ve been missing payments for a while on multiple accounts.  If you have a foreclosure on your credit, it will take a serious hit—often one that is more serious than bankruptcy causes. A Miami bankruptcy attorney will be able to look at your specific circumstances and help you determine if a bankruptcy will help you achieve better credit in the short-term and long-term.   

Should I be worried about the Mortgage Debt Relief Act expiring at the end of this year (2012)?

Expiration of the Mortgage Debt Relief Act – Should I be Worried?

The Mortgage Debt Relief Act of 2007 is set to expire at the end of 2012 and many Florida homeowners facing foreclosure are concerned about the effects this will have on their situation.  However, before you stress too much, there are several points you should know about this Act and how it can affect you.

First, you need to know a little about how foreclosures and deficiencies related to them work.  Let’s say you’re one of the many Florida homeowners who owe more on your home than the current value of the home.  If your mortgage is for $250,000 but your home is currently valued at $150,000, the $100,000 difference is the deficiency that would still be owed to your lender—even if your home goes into foreclosure.  For many people, this deficiency is money that the lender would still be able to collect on.  Not only would you lose your home, but the lender would also be able to collect on the $100,000 deficiency, even after foreclosing on your home and forcing you to seek for another place to live. 

However, many lenders are offering forgiveness of the debt that would otherwise be considered the deficiency on your mortgage, especially if it means getting you out of the home so they can attempt to resell it.  The problem with this is according to federal tax code, that forgiven debt is considered to be income for you and is taxed as such.  This means that even if the lender forgives the deficiency you would otherwise owe on the mortgage after the foreclosure, you could still be taxed for the entire amount.  For some people, this is a very high amount! 

The Mortgage Debt Relief Act of 2007 provides relief to people who were granted forgiveness of deficiencies by their lender, stating that they are no longer responsible paying taxes on them, so it’s a very real concern for many people facing foreclosure as to whether or not this Act will be extended past 2012.  However, since it has already been extended and this is an election year, it is highly likely that it will be extended again.  Even if it’s not, one way of avoiding that potentially huge tax liability is to just file bankruptcy. Either way, talk to a qualified foreclosure or bankruptcy attorney to review your options.