Security Clearance Denial

Charged Off Debts Can Cause Clearance Denial or Revocation

There is a common misperception among security clearance applicants regarding the requirement to disclose or resolve charged off debts. Many believe when creditors charge off a debt then they are no longer indebted. Not true! Here is a simple definition of the term: a charge-off is a debt that a creditor has given up trying to collect on after you’ve missed payments for several months. The creditor has reported it to the credit reporting agencies as a charge-off account. This does not mean you no longer are responsible for it. Oftentimes, the debt is sold to a third party collection agency who may legally try to obtain full payment or a partial payment settlement. As an example of this, here is the summary of a recent Defense Office of Hearing and Appeals (DOHA) case involving financial issues:

The applicant was denied clearance eligibility based on financial considerations and personal conduct. The Statement of Reasons (SOR) cited debts totaling over $36,000 that included: a repossessed vehicle of over $14,000; three charged-off credit card debts totaling over $11,000; and a charged-off delinquent electronic payment of about $550. He failed to follow through on promises he made to file bankruptcy or resolve the charged off debts, instead, arguing he did not owe on the charged off accounts since they were from several years ago and the creditors had stopped pursuing payment. Factors considered by the judge in favor of the applicant included his military service and that he held a clearance for 30 years.

However, there was not enough mitigating evidence to show the applicant acted responsibly in addressing his delinquent debts, even after being issued the SOR and having a year to act on the debts before the DOHA hearing. As always, the general standard is that a clearance may be granted only when clearly consistent with the interests of the national security and any doubt concerning an applicant being considered for national security eligibility will be resolved in favor of the national security. Financial issues remain the top issue in security clearance denials. Applicants with issues should take action to mitigate any concerns prior to applying for a clearance.


  1. I also heard a story about someone who got some debt written off (or whatever the correct phrase is) and then got in trouble for not reporting it as income!

  2. When debt is forgiven, the client should receive a 1099-C during the next tax filing season. Many lose or ignore this form since they have no idea about any tax paperwork other then a W-2. The amount of debt forgiven must, in most cases, be treated as income. There are, however, exceptions and it certainly may be worthwhile to consult a professional before filing.

  3. Hmmm, understood tax law and definition is different than national security. It would seem if the government treated the charge off as income, and you paid tax on this amount…it would then constitute settled debt. But one definition for an agency isn’t applicable to the next. Certainly I would tell an applicant to speak to it on the form. I would like to know if the credit score had since recovered. We had several clearances held up for people with 800 credit scores, current credit agencies showed no record of an uncollected and challenged debt to Sprint. Yet the BI person had a report showing the amount. If a consumer cannot get access to see the debt and the scores are in near perfect range…again I would consider it a settled matter. Of course demonstrating over time one is not reliable for things they charged paints a bigger picture, not willing to follow established rules of society, etc.

    I love interacting and learning on this forum. I thank all of you for making me a better FSO. It is good to find concurrence in interpretation, but dare I say, when challenged…and I learn I was wrong…those are the ones that stand out. I appreciate those moments in life.

  4. Two different things . . . Forgiven debt and charged off debt.

    Charge offs do not affect your tax return and you will not receive any notification from the debtor that you bill is being charged off. In addition, you still owe the money.

    Forgiven debt is usually the result of a negotiated settlement with the debtor. You owe $7000, pay $3000 and $4000 is forgiven? You don’t owe any more money and you will receive a 1099-C ("C"ancelled debt) to report the forgiven debt as income on your taxes.

    BOTH will show up on your credit report and both will be questioned during your investigation.

  5. Ahhhh tracking. That makes it clear.

  6. The 1099-C enables the creditor to take the ‘loss’ on the debt-holders (now) ‘income.’

    This makes perfect sense.