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Practicing bankruptcy law in the greater Washington, DC area, we often get this question from nervous government employees and defense contractors: "If I file bankruptcy, will I lose my security clearance?"

The answer is: It's not the bankruptcy itself that is the problem. It's the underlying circumstances leading to the bankruptcy that is the determining factor.

Think about it. If you got a very serious illness and racked up a million dollars in medical bills you could not pay, and needed bankruptcy relief to stop the collection calls, lawsuits and garnishments, does the bankruptcy -- in any way -- reflect upon you personally as a security risk? Was the illness your fault? Is it evidence of a personality defect that would make it more likely you would breach security? I think you know the answer.

Where the circumstances leading to the bankruptcy were financial irresponsibility, then that's another matter. But then, the late charges, delinquencies, high credit balances, judgments, tax liens, etc. would already exist on your credit report. If anything, the bankruptcy would actually show you acting responsibility by exercising your legal right to "wipe the slate clean" and get the "fresh start" the law allows.

The US Air Force Academy's website discusses this issue and provides some interesting guidance: (The highlighted text is mine.)

Will Bankruptcy Affect My Security Clearance?

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 here, with one exception: it never hurts to have a good reputation with your co-workers and your chain of command.

Call us and make an appointment. We'll analyze your situation, and discuss all options to address your problem in person.

Tis the time for resolutions. As an attorney specializing in the financial woes of small businesses and the self-employed in DC, VA and MD and drawing from my 22 years of experience, here are three tips to consider as you draw up your list for 2012:

1) Keep books. It's that simple. So many of the financial problems of small business could be solved simply by keeping regular books, including:

• Cash flow problems. This is almost certainly the leading factor causing a bankruptcy filing. Often, the business will actually be profitable or have positive net value, but because the managers have not managed the finances to maintain liquidity, they cannot pay bills on a current basis. This, in turn, leads to the debt enforcement actions that force the business to seek bankruptcy court protection so that it can reorganize its finances. It might have been avoided if the managers kept regular books and knew where they stood in terms of cash, account receivables and payables.
• Tax problems. Without keeping books, business may rely solely on what is in the bank account as a gauge of how they're doing. Unfortunately, the balance in the account does not take into account non-cash accruals that have built up during the year, the most critical being taxes. At year end, they don't have cash enough to pay the tax bill.
• Getting loans or selling your business. Persons evaluating the business as purchasers or lenders will not give you financing or top dollar unless there are regular books showing the business' performance over time or its ability to service the debt. (By the way, as a business owner you need to look at your business as a asset for eventually sale and not merely as a job provide you solely with income.)

Also, keep separate bank accounts for your business and personal life. This is a corollary to the first rule. If you're keeping books for your business to track your business' performance, you will have to create a separate business bank account.

2) Watch how you pay the people who work for you. Again, this is near the top of the list of small business problems seen by our DC-based tax and bankruptcy law firm. Know how the tax law distinguishes "independent contractors" from "employees," and how that law requires the business owner to withhold taxes and contribute to Social Security and Medicate for the latter, or face personal fines -- basically equal to that amount -- for NOT doing so. It's not fun.

3) Get help from professional accountants and business lawyers. No one wants to pay for advice at the front end, but when the problems hit, the cost can be much, much more. It's a cliche, but true: An ounce of prevention is worth a pound of cure.

If you are looking for an accountant who will give you such all-important business advice, as well as accounting services, we recommend Business Wise Consulting, Inc., led by Dave Parikh, an MBA and CPA, based in Silver Spring, MD and serving small businesses in the Washington, DC area.

The answer to whether or not unemployment benefits are dischargeable in bankruptcy hinges on the following:  1) whether the state receives adequate notice of the bankruptcy filing; 2) whether the state upon proper notice brings a timely complaint (adversarial proceeding) in the bankruptcy court, and 3) whether the state wins its complaint and proves that the debtor obtained the unemployment overpayment by fraud or theft as opposed to having made a reasonable mistake.
A debt that is discharged in bankruptcy is a debt that is no longer enforceable.  The general rule is that a debt is dischargeable at the conclusion of a Chapter 7 or a Chapter 13 bankruptcy case absent some specific statutory provision to the contrary.  The exceptions to discharge are primarily enumerated in sections 523, 727, 1228 and 1328 of the United States Bankruptcy Code.
Some of the provisions of the Bankruptcy Code are “self-executing” excluding a debt from discharge automatically even if the creditor does not challenge the dischargeability of the underlying debt.  Specifically these sections include, 11U.S.C. §523(a)(1), (3), (5), (7), (8), (9), (10), (11), (12), (13), (14), (16), (17), (18), or (19).   However, other provisions of the bankruptcy code require that the creditor file a separate complaint known as an adversarial proceeding within a strict time frame otherwise the underlying debt is discharged.   The provisions of the Bankruptcy Code that might bar the discharge of an overpayment of state unemployment benefits are not self-executing.  These three provisions fall under 11 U.S.C. § 523(a)(2), (4), (6), and (15).  Of these provisions only 523(a)(2) and  (a)(4) would seem applicable.  These two provisions are known as the “fraud” provisions.  Accordingly in order for the state to prevail in excluding unemployment overpayments from discharge, they must prevail in a timely filed fraud complaint brought in the U.S. Bankruptcy Court.
In general, a complaint to determine the dischargeability of debt under § 523(a)(2), or (4), must be filed not later than sixty days after the first date set for the creditors meeting. Parties must have at least thirty days’ notice of this deadline. Fed. R. Bankr. P. 4007(c).   However the state would need to be given proper notice so that they would have the opportunity to file a complaint and challenge the dischargeability of the overpayment pursuant to 11 U.S.C. §523(a)(3). This is why it is extremely important that all creditors be properly listed on the debtor’s bankruptcy schedules.
Again, there are two provisions of Bankruptcy Code Section 523 that if successfully brought by the state seeking to recover an unemployment overpayment claim would bar the discharge of the debt under the Bankruptcy Code.  The first such provision is found under 523(a)(2).
Section 523(a)(2) excepts from discharge debts incurred in obtaining money, property, or services by false pretense or fraud.  Accordingly, the debtor who knowingly made a false statement on his unemployment application or continuing unemployment forms would be excepted from discharge under this provision provided the state timely brought and proved their complaint.  A debtor who could prove that they reasonably believed that they were entitled to the overpayment money would prevail and be entitled to discharge the debt.
The other applicable exception would come under Bankruptcy Code Section 523(a)(4).  This provision bars a discharge where the plaintiff proves fraud or defalcation while the defendant was acting in a fiduciary capacity, or committed embezzlement, or larceny.  These provisions would be applicable if the state were able to prove that you received an unemployment benefit by means of what is commonly known as theft.  Again, the state would have to timely file their complaint and prove that that is what happened.
In conclusion, at least in California in my experience rarely does the state when properly notified challenge the overpayment by timely bringing an adversarial complaint.  Accordingly, it is critically important that the overpayment claim be listed on the debtor’s bankruptcy schedules and that notice to the state be properly addressed.  For California overpayments you would want to notice  Employment Development Department, State of California, Bankruptcy Unit – MIC 92E, P.O. Box 826880, Sacramento, CA 94280.  In the event that the state brings a timely complaint, the debtor/ defendant in consultation with his bankruptcy attorney must decide if reasonable defenses exist to the state’s claim and the costs and benefits of defending the claim.  Unless the facts tilt in favor of debtor / defendant it may be advisable to work out a settlement with a repayment plan.  For more information contact San Diego bankruptcy attorney Raymond Schimmel at (619) 275-1250 or at http://www.endbillcollections.com.
 

Various "Robo-Signer" class action suits have been filed across the country. The case of Geoffrey Huber, et al. vs. GMAC, LLC, n/k/a Ally Financial, Case 10-2458-SCB was filed in the Federal District Court of the Middle District of Florida on November 2, 2010. The complaint alleges that the Defendant engaged in a fraudulent scheme to fabricate and falsify affidavits and other documents to support foreclosure complaints and judgments.

The action is being brought as a statewide class action on behalf of all other similarly-situated obligors who have been obligors on notes and mortgages in the State of Florida served by the Defendant within the previous three years. The relief sought is based on an alleged violation of constitutional rights under color of state law 42 U.S.C. 1983, abuse of process, and unfair and deceptive trade practices pursuant to Fla. Stat. 501.201 et seq. Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983