There are a lot of details to understand when you are deciding whether filing for bankruptcy is a good idea for you. If you are a member of a credit union, there are some specific things to consider that are unique to this type of organization.
Creditors in a Bankruptcy
Any money that you owe before filing bankruptcy is called a debt or liability. Anyone or any company holding a debt is called a creditor. There are different chapters (or types) of bankruptcy that you can file for as an individual consumer. For purposes of this article, we will focus on Chapter 7, which is also known as a liquidation.
In Chapter 7 you can walk away from some (or all) of your debts and get a fresh start. Whether or not you can walk away from a debt depends on the type of debt. Debts are divided into three categories, secured, unsecured and priority. Below we will explore the first two categories which are relevant to the specific issues with credit unions.
Secured debts are debts that are tied to a specific property. The most common examples of secured debts are a mortgage on your house or a loan on your car. When a debt is secured you risk losing the property if you fall behind on the payments. So if a creditor has a mortgage on your house and you fall behind your creditor can start foreclosure. Similarly, if a creditor has a loan on your car and you miss a few payments, they can repossess the vehicle. In a Chapter 7 you can generally keep your secured property if you are current on the payments, but there is no opportunity to catch up on missed payments if you are behind.
Unsecured debts are debts that are not tied to a specific property. The most common examples of unsecured debts are medical bills and credit card bills. If you fall behind on paying your medical bills from surgery the creditor cannot take back the medical procedure. Their only remedy is to come after you for the money. Similarly with credit card bills if you default the creditor cannot come to your house and take back the items you purchased, again they are limited to only pursuing the money you owe. In Chapter 7 you can walk away from (or “discharge”) your unsecured debts. If you have primarily (or only) unsecured debts Chapter 7 may be a great remedy for you.
How Credit Unions are Different from Banks and Other Lenders
Credit Unions are different from banks and other lenders in some important ways when it comes to bankruptcy, particularly to cross-collateralization, set-offs, and loss of membership.
Credit Union Benefits
First, we will look at some of the benefits that credit unions offer. Many people choose to become a member of a credit union because it functions much like a bank, offering competitive banking advantages without some of the hassles or fees. Membership in a credit union gives you an “ownership” interest, and those benefits can include lower interest rates and often better customer service. For many people, credit unions offer the best chances of getting a loan.
Credit Union Issues in Bankruptcy
Next, we will explore issues that arise with credit unions in bankruptcy that are fairly unique to this particular type of lender.
Our earlier discussion about the different types of debt was pretty straightforward. Secured debts are those where the property can be taken away from you and unsecured debts are those where you just owe money for the goods or service performed. Pretty simple right? Well, here’s where credit unions make things more complicated. Credit unions often participate in a practice called cross-collateralization. This is something that is generally buried in the fine print of your loan agreement.
Reaffirming your car loan
Let’s say your credit union holds your car loan. When you signed the paperwork it was probably clear that if you did not maintain your payments the credit union could repossess the car, just like any secured debt. What was probably not clear is that the car will also become collateral for any other loans you take out through the credit union, including loans and credit cards.
Credit unions are typically happy to enter into reaffirmation agreements with their members, but this cross collateralization complicates things. It essentially takes something that is traditionally unsecured debt (like a credit card) and makes it secured (because it is now tied to your car.) This presents issues in bankruptcy because if you want to discharge the credit card in bankruptcy you would have to return the car because it is collateral on the credit card debt. Similarly, if you want to keep the car, you would need to reaffirm (agree to continue paying on) the credit card so that it is not discharged in the bankruptcy.
Set offs are another issue of concern for members of a credit union. Often members of credit unions have checking or savings accounts in addition to any loans. Set offs can occur if a credit union has the right to set off (or withdraw money from) your account to recover any losses caused by your actions, such as not paying back a loan or obtaining a discharge in bankruptcy. So in the event you are trying to walk away from an unsecured debt they could mitigate their loss by taking money directly from your account to cover or offset the loss.
This can be particularly problematic if you have a direct deposit set up with your credit union, as there are recurring opportunities for them to clear out your account. When you file a bankruptcy the credit union will likely freeze your account. Once your account is frozen your access to it is cut off so you cannot access the funds to pay any other obligations.
Loss of membership
Finally, your membership can be revoked if you file for bankruptcy or otherwise default on an obligation to the credit union. The credit union can choose to take away your membership, which would include access to any checking or savings accounts you hold there unless you agree to pay back the debt.
If you have a credit union account jointly with another person who is not filing for bankruptcy, it’s probably a good idea if you let them know before you file your Chapter 7 bankruptcy. The easiest way to ensure that the joint account holder does not lose any funds due to a set off is to remove their funds from the account before you file, under the motto of “better safe than sorry.” Your trustee may have questions about that, so make sure to keep good records. Assuming the joint account holder’s membership in the credit union is not based solely on the account they are on with you, their membership should not be affected.
How to best protect your interests
If there is a strong possibility that you are going to file for bankruptcy make certain to stop any direct deposit going into a credit union before you file your case. It is also a good idea to move the bulk of any savings or investments you may have out of the credit union and into a regular bank account. While you do have exemptions available to you in bankruptcy to protect various assets, you generally do not have much available to protect money in an account. More importantly, if you owe your credit union any money at the time that you file (whether a loan, credit card, or past due fees) keep in mind that the credit union has the right to set off the debt. This means they can take the money in your account or freeze your account, despite the bankruptcy and without regard for any exemptions you may have claimed on the money in the account. The best defense is a good offense: don’t leave money in your credit account for them to freeze or off set.
It's ok to stop using your credit union account even if that means you have to open a new account with a bank to use instead. This is not uncommon and as long as all accounts are listed on your bankruptcy forms is not a problem. If you end up closing your credit union account before filing your case, make sure you get a copy of all account statements for the last 12 months first, so you don't have to worry about getting the statements after your account has been closed.
If you have a secured loan through your credit union make sure you know if it is also cross-collateralization for any unsecured debts (usually credit cards.) If that is the case, you may need to reaffirm on that particular card or cards to be able to keep your secured property in Chapter 7. You can always consult an attorney with any questions you may have about your credit union and debts. If you do not hold any unsecured debt with your credit union and/or you are no longer interested in keeping the secured collateral, you can use our Upsolve screener to see if you are a good fit for Chapter 7 bankruptcy. If you do decide to file Upsolve can partner with you along the way for no cost to help get your finances back on track.