Wednesday, June 16, 2010

Can I Be Discriminated Against by an Employer Because I Filed Bankruptcy

I could happen if you are in the military or require security clearances for your employment.  Since 2007, the Defense Office of Hearing and Appeals (DOHA) showed approximately a 50 percent rate of denials.  This is two times more than any other security clearance denial.

Guideline F listed in the Adjudicative Guidelines For Determining Eligibility For Access To Classified Information provides denial of security clearance for "Financial Considerations."  Specifically,  "Excessive indebtedness increases the temptation to commit unethical or illegal acts in order to obtain funds to pay off the debts."  Most Americans who betrayed their country did it for financial gain—about half were motivated by a real or perceived urgent need for money and about half by personal greed.

Aside from compulsive/addictive behavior, deceptive/illegal financial practices, and unexplained affluence, the remaining potentially disqualifying conditions detailed in Guideline F can be boiled down to one security concern—delinquent debt.  High debt to income ratio and excessive indebtedness are listed as a potentially disqualifying condition, but this rarely comes into play absent any past or present delinquent debt or obvious signs of unexplained income.  

Low credit scores are not listed as a potential disqualifying condition, because factors unrelated to debt affect credit scores.

However, all is not lost.  While Delinquent debt causes the greatest concern, you can appeal the denial.  In looking at the denial the Board will take into consideration what caused the debt.  How did you respond to the debt.  How much was the debt.  Emergencies, family illness, bad business investment and other factors which do not reflect upon a person's reliability, trustworthiness or judgment factor into how debt is accumulated.  If the debt occurred due to situations beyond the applicant’s control and the applicant is handling the debt in a reasonable manner (including bankruptcy or debt consolidation), the significance of the problem is substantially reduced. 

Response to debt is evaluated by the things people do (or don’t do) about delinquent debt. How people deal with debt is often a decisive consideration. Those who ignore their financial responsibilities may also ignore their responsibility to safeguard classified information.  Classic indicators of irresponsibility and unethical behavior are:

• Changing addresses without notifying creditors
• Failure to take reasonable measures to pay or reduce debts
• Knowingly issuing bad checks
• Increased credit card use immediately before filing for bankruptcy

The words, “bankruptcy” and “credit counseling” do not appear anywhere in the Adjudicative Guidelines.  This is because both bankruptcy and credit counseling can be considered positive efforts to get one’s finances under control.  What is important is the underlying reason for the bankruptcy or credit counseling.

Amount of debt focuses primarily on the delinquent amount, but as previously mentioned total debt, if it appears excessive, may also be taken into consideration.  Significant delinquent debt is a security concern.  

Your monthly payment for all of your credit cards should not exceed 20 percent of your monthly take-home pay.  Having bills which cause you to spend more than 20% of your monthly take-home is a sign of a financial problem.  

According to Office of Personnel Management (OPM), Federal Investigative Notice No. 06-07, OPM does not automatically expand investigations for financial issues, unless:

• Credit report reflects current aggregate delinquent debt totaling $3,500 or
• Bankruptcy within the past 2 years or
• Bankruptcy within the past 3 to 5 years with evidence of current credit problems.

This does not mean that delinquent debt totaling less than $3,500 is not significant, but it does suggest that, absent any aggravating circumstances or other security issues, the government is not overly concerned about small amounts of delinquent debt.  OPM considers bankruptcy only as a trigger for further inquiry.

In making a decision as to whether to file for Bankruptcy, if you work for the government or in any other highly sensitive security location, it is important that you learn how to use a budget and avoid the kind of indebtedness that could put you at risk.  However, if you have already crossed that line, call me so we can teach you special budgeting techniques and possible debt settlement options which could help you avoid bankruptcy.

Call us today for your free consultation!

Tuesday, June 1, 2010


An unlicensed contractor charged with violations under B&P Code 7031(b) are discharged in a very limited set of circumstances.  There must be a finding of no damages under 7061.


Ghomeshi v. Sabban (In re Sabban), --- F. 3d ---  (9th Cir. April, 2010)
Issue:   Is a claim for disgorgement from an unlicensed contractor under Cal B&P 7031(b) dischargeable even when there is a specific finding of fraud on the basis that there were no actual damages?
Holding:   Yes.  
appeal from the BAP
Judge William A. Fletcher,
The debtor operated an unlicensed home remodeling business.  He falsely told Ghomeshi that he was licensed.  “California law provides that a client who employs an unlicensed contractor may recover all compensation paid to that contractor, regardless of whether the contractor has committed fraud and regardless of whether the client has sustained actual harm. Cal. Bus. & Prof. Code § 7031(b).”  After the work was done, Ghomeshi sued the debtor in state court under B&P 7031(b).  The state court found that the debtor lied but found that Ghomeshi did not suffer any harm.  Under California law, however, the state court awarded damages of $123,000, i.e., the full amount paid to the debtor.  The debtor filed chapter 7 and Ghomeshi filed a non-dischargeability complaint.  Ghomeshi argued that in Cohen v. Dela Cruz, the Supreme Court said that damages under state law are non-dischargeable once fraud is found.   The bankruptcy court ruled that the debt was discharged and the BAP affirmed. 
The 9th Circuit also affirmed distinguishing this case from Cohen. 
“[I]n Cohen v. dela Cruz, the Supreme Court held that the reach of § 523(a)(2)(A) is not limited to the amount of benefit received by the debtor.  Rather, §523(a)(2)(A) ‘prevents the discharge of all liability arising from fraud.’  Following Cohen, we have concluded that there is no requirement that the debtor ‘have received a direct or indirect benefit from his or her fraudulent activity in order to make out a violation of § 523(a)(2)(A).’” 
“We note two ways in which the case before us is different from Cohen.  First, unlike the tenants in Cohen, Ghomeshi suffered no actual harm as a result of [the debtor’s] misrepresentation that [he] held a contractor’s license.  Actual damages are available under § 7160, but the state court specifically declined to award them, holding that Ghomeshi had suffered no harm.  Second, unlike the New Jersey Consumer Fraud Act at issue in Cohen, § 7031(b) is not premised on the commission of fraud.  In order to recover compensation paid to a contractor, a plaintiff in a §7031(b) suit need only show that the contractor was unlicensed.”
“We hold that because the award of $123,000 was made under a statute that is not premised on either fraud or actual harm, it is not a debt for money obtained by fraud within the meaning of 11 U.S.C. §523(a)(2)(A).  We therefore affirm the bankruptcy court’s determination that the award of $123,000 under § 7031(b) is dischargeable.”