Military Bankruptcy: Security Clearance Impact, Chapter 7 vs 13 (2026)
Bottom Line Up Front: Bankruptcy doesn't automatically disqualify you from military service or security clearances. What matters: Are you taking responsibility for your financial situation? Chapter 7 wipes most debt (3-4 months process). Chapter 13 creates 3-5 year payment plan. SCRA provides additional protections during the process. Thousands of service members file bankruptcy and continue successful careers.
Table of Contents
- Bankruptcy Basics for Military
- Chapter 7 vs Chapter 13
- Security Clearance Impact
- SCRA Protections in Bankruptcy
- Step-by-Step Bankruptcy Process
- Common Mistakes
- FAQ
- Official Sources
Bankruptcy Basics for Military
When Bankruptcy Makes Sense
Bankruptcy is a legal tool, not a moral failure.
Consider bankruptcy if:
- ✅ Debt exceeds annual income
- ✅ Minimum payments don't cover interest
- ✅ Collections, garnishments, lawsuits pending
- ✅ No realistic way to pay off debt in 5 years
- ✅ Considered harming yourself over financial stress
Don't file bankruptcy if:
- ❌ Debt is manageable with budget adjustments
- ❌ You qualify for debt consolidation at lower rates
- ❌ Your situation is temporary (deployment ending, promotion coming)
- ❌ You haven't tried negotiating with creditors
- ❌ Military aid societies could help
What Bankruptcy Can Discharge
Typically WIPED OUT:
- Credit card debt
- Medical bills
- Personal loans
- Payday loans
- Car repossession deficiency
- Utility bills
- Cell phone contracts
Typically NOT DISCHARGED:
- Student loans (with rare exceptions)
- Child support/alimony
- Recent taxes (last 3 years)
- Court-ordered fines
- Debts from fraud
- DUI-related liabilities
Chapter 7 vs Chapter 13
Chapter 7: "Fresh Start" Bankruptcy
How it works:
- Most unsecured debt wiped out completely
- Process takes 3-4 months
- Must pass "means test" (income below median)
- May lose non-exempt assets (rarely happens for military)
Who qualifies:
- Income below state median for your household size
- Most E-1 to E-6 qualify easily
- E-7+ and officers may need Chapter 13 instead
Military Advantages for Chapter 7:
- BAH/BAS not counted as income in some states
- Combat pay may be excluded from means test
- SCRA protections during proceedings
Cost: $335 filing fee + $1,500-$3,000 attorney fees
Timeline:
- File petition (Day 1)
- Automatic stay stops all collections (Day 1)
- 341 Meeting with trustee (30-45 days)
- Discharge granted (60-90 days after 341)
- Total time: 3-4 months
Chapter 13: "Wage Earner" Bankruptcy
How it works:
- Create 3-5 year payment plan
- Pay portion of debt (often 10-50%)
- Keep all assets
- Remaining debt discharged after plan completion
Who it's for:
- Income above Chapter 7 limits
- Want to keep assets (home with equity, vehicles)
- Have regular income to make payments
- Officers and senior NCOs often use this
Military Advantages for Chapter 13:
- Steady military income makes plan reliable
- Can catch up on mortgage/car payments
- Keep security clearance more easily (showing responsibility)
Cost: $310 filing fee + attorney fees (often paid through plan)
Timeline:
- File petition and proposed plan
- Automatic stay stops collections
- Confirmation hearing (45-60 days)
- 3-5 years of plan payments
- Discharge after completion
Quick Comparison
| Factor | Chapter 7 | Chapter 13 |
|---|---|---|
| Timeline | 3-4 months | 3-5 years |
| Debt discharged | Most unsecured | Remaining after plan |
| Assets | May lose non-exempt | Keep all |
| Income requirement | Below median | Regular income |
| Cost | $2,000-$3,500 | $3,000-$5,000 |
| Best for | E-1 to E-6, low assets | E-7+, officers, homeowners |
Security Clearance Impact
The Big Question: Will I Lose My Clearance?
Short answer: Probably not, IF you handle it correctly.
What adjudicators look for:
- Are you taking responsibility? Filing bankruptcy = YES
- Are you being honest? Disclosing on SF-86 = YES
- Was it circumstances vs. irresponsibility? Context matters
- Have you corrected the behavior? Post-bankruptcy financial health
Bankruptcy Is NOT Automatic Disqualification
From the Adjudicative Guidelines:
"Conditions that could mitigate security concerns include: the behavior happened so long ago, was so infrequent, or occurred under such circumstances that it is unlikely to recur and does not cast doubt on the individual's current reliability, trustworthiness, or good judgment."
Translation: If you file bankruptcy, follow through responsibly, and demonstrate financial stability afterward, your clearance is likely safe.
What Hurts Your Clearance (Not Bankruptcy Itself)
Red flags that actually cause denials:
- ❌ Hiding financial problems
- ❌ Lying on SF-86
- ❌ Continuing irresponsible spending after bankruptcy
- ❌ Gambling-related debt
- ❌ Refusing to address financial issues
What Helps Your Clearance
Mitigating factors:
- ✅ Filing bankruptcy (taking responsibility)
- ✅ Working with financial counselor
- ✅ Creating and following budget
- ✅ Building emergency fund post-bankruptcy
- ✅ Full disclosure on security forms
SF-86 Disclosure
Question 26 asks about financial issues including bankruptcy.
How to answer:
- Be honest - Lying is automatic disqualification
- Explain circumstances - Medical emergency, divorce, deployment hardship
- Show resolution - "Filed Chapter 7, discharged [date], now debt-free"
- Demonstrate learning - "Completed financial counseling, maintain budget"
SCRA Protections in Bankruptcy
SCRA Benefits During Bankruptcy
The Servicemembers Civil Relief Act provides:
-
Stay of Proceedings
- Can delay bankruptcy proceedings during deployment
- Request continuance if military duties prevent attendance
-
Interest Rate Reduction
- Pre-service debts capped at 6% (affects payment calculations)
- Can reduce Chapter 13 plan payments
-
Default Judgment Protection
- Creditors can't get default judgment without proving you're not on active duty
- Provides time to respond to collection lawsuits
-
Reopening Defaults
- Can reopen cases where military service affected ability to respond
How to Invoke SCRA in Bankruptcy
- Provide copy of deployment orders
- Notify bankruptcy court of military status
- Request SCRA protections in writing
- Include SCRA status in Chapter 13 plan
Step-by-Step Bankruptcy Process
Step 1: Evaluate Your Situation
Before filing, consider alternatives:
-
Military Aid Societies
- AER, NMCRS, AFAS provide zero-interest loans
- Won't affect security clearance
-
Debt Management Plan
- Non-profit credit counseling agencies
- Negotiate lower interest rates
- One monthly payment
-
Debt Consolidation Loan
- Navy Federal, USAA offer lower rates
- Combine multiple debts
-
Direct Negotiation
- Call creditors, explain hardship
- Request reduced balances or payment plans
Step 2: Get Free Counseling
Required before filing bankruptcy:
- Credit counseling from approved agency
- Must complete within 180 days before filing
- Many offer free or low-cost military rates
- Get certificate of completion
Find approved agencies: justice.gov/ust/credit-counseling-debtor-education-courses
Step 3: Consult with Attorney
Find military-experienced bankruptcy attorney:
- JAG can provide referrals (not representation)
- Military legal assistance offices have lists
- Look for attorneys near military bases
What attorney will assess:
- Chapter 7 vs Chapter 13 eligibility
- Exempt vs non-exempt assets
- Impact on security clearance
- SCRA protections available
Average costs:
- Chapter 7: $1,500-$3,000
- Chapter 13: $3,000-$5,000
Step 4: Gather Documents
You'll need:
- Last 6 months of pay stubs (LES)
- Last 2 years of tax returns
- List of all debts with amounts
- List of all assets with values
- Bank statements (all accounts)
- Mortgage/lease agreements
- Vehicle titles and loan documents
- Recent credit report
Step 5: File Petition
When you file:
- Automatic stay begins immediately
- All collection activity STOPS
- Creditors cannot contact you
- Garnishments halt
- Foreclosures pause
- Repossessions stop
Step 6: Complete 341 Meeting
Meeting of Creditors:
- Occurs 30-45 days after filing
- Brief (usually 5-15 minutes)
- Trustee asks questions under oath
- Creditors rarely attend
- Military members can attend by phone if deployed
Step 7: Complete Financial Education
Second required course:
- Debtor education course
- Must complete before discharge
- Certificate required
- Usually 2 hours online
Step 8: Receive Discharge
Chapter 7: Discharge 60-90 days after 341 meeting
Chapter 13: Discharge after completing 3-5 year plan
After discharge:
- Most debts legally eliminated
- Fresh financial start
- Begin rebuilding credit
Common Mistakes
Mistake 1: Hiding Bankruptcy from Security Office
Why it's wrong: Lying is automatic disqualification. They WILL find out.
Better: Disclose honestly, explain circumstances, show responsibility.
Mistake 2: Running Up Debt Before Filing
Why it's wrong: Fraud. Debts incurred knowing you'll file can be excepted from discharge.
Better: Stop using credit immediately when considering bankruptcy.
Mistake 3: Not Exploring Alternatives First
Why it's wrong: Bankruptcy stays on credit report 7-10 years.
Better: Try military aid societies, negotiation, consolidation first.
Mistake 4: Paying Favored Creditors Before Filing
Why it's wrong: "Preferential payments" can be reversed by trustee.
Better: Treat all creditors equally in year before filing.
Mistake 5: Filing Without Attorney
Why it's wrong: Complex rules, easy to make disqualifying mistakes.
Better: Invest $1,500-$3,000 in experienced attorney.
FAQ
Can I stay in the military after filing bankruptcy?
Yes. Bankruptcy alone is not grounds for discharge. However, extreme financial irresponsibility combined with other issues could lead to administrative action.
Will bankruptcy appear on my record?
Yes. Chapter 7 stays on credit report for 10 years. Chapter 13 for 7 years. However, impact diminishes over time.
Can I file bankruptcy while deployed?
Yes. SCRA provides protections. You can request postponement or attend hearings by phone. Your attorney handles most proceedings.
Will my command be notified?
Not automatically. However, if creditors contact your command or security clearance review uncovers it, your chain may become aware.
Can I include military Star Card debt?
Yes. AAFES Star Card debt is dischargeable like other credit card debt.
What about TSP loans?
TSP loans cannot be discharged. However, if you separate from service, unpaid balance becomes taxable distribution.
How soon can I buy a house after bankruptcy?
VA loan: 2 years after Chapter 7 discharge, or 1 year into Chapter 13 (with trustee approval)
FHA loan: 2 years after Chapter 7, 1 year after Chapter 13
Action Steps
Before Deciding:
- List all debts with amounts and interest rates
- Calculate total monthly payments vs income
- Call Military OneSource for free financial counseling
- Explore military aid society options (zero-interest loans)
- Consult with bankruptcy attorney (many offer free consultations)
If You Decide to File:
- Complete required credit counseling course
- Gather all financial documents
- Choose Chapter 7 or Chapter 13 with attorney guidance
- Stop using credit cards and incurring new debt
- File petition through attorney
After Filing:
- Attend 341 Meeting of Creditors
- Complete debtor education course
- Update SF-86 when required (be honest)
- Begin rebuilding credit with secured card
- Build emergency fund ($1,000, then 3-6 months)
Official Sources
- U.S. Courts Bankruptcy Information: uscourts.gov/services-forms/bankruptcy (Last verified: 2026-02-22)
- Credit Counseling Agencies: justice.gov/ust/credit-counseling-debtor-education-courses (Last verified: 2026-02-22)
- Military OneSource Financial Help: militaryonesource.mil (Last verified: 2026-02-22)
- Security Executive Agent Directive 4 (SEAD 4): dni.gov (Adjudicative Guidelines)
Related Guides
- Predatory Lending Escape Guide
- Security Clearance Financial Requirements
- SCRA Complete Benefits Guide
- DFAS Overpayment Debt Recovery
Remember: Bankruptcy is a legal tool for financial recovery, not a career-ender. Thousands of service members have filed bankruptcy and continued successful military careers. What matters is taking responsibility, being honest, and demonstrating improved financial behavior afterward.