Owing Money to a Credit Union While Filing Bankruptcy

Posted on Oct 03, 2016 By Mary Pool

Attorney Mary PoolIf you are contemplating bankruptcy and owe money to a credit union, it is very important for your bankruptcy attorney to know that fact so that they can advise you of how filing bankruptcy can affect your credit union relationship.  Generally, there are three situations that could arise when you owe a credit union money and file bankruptcy.

Credit Union Membership

As you already know, you had to become a member with the credit union to be able to establish an account with the credit union.  This membership may be canceled if you file for bankruptcy and you are not paying all debts owed to the credit union in full.

Cross-collateralization

Cross-collateralization is when the collateral securing one debt is used for collateral on another debt.  Credit unions are notorious for using cross-collateralization and often people have no idea that it has even been done if they fail to read the fine print on the loan contract that they are signing.  If you have multiple debts with a credit union then even your unsecured debts (i.e., credit cards, overdraft protection) would be cross-collateralized with any secured debts that you have with the credit union.  If you stop paying on the credit card, then the credit union could repossess the collateral securing another note since you were not paying all debts owed to them due to cross-collateralization.

For example, if John Smith financed his car with XYZ Credit Union, then later obtains another loan with XYZ Credit Union on his wife’s vehicle and then later obtains a credit card with XYZ Credit Union, then all three debts are cross-collateralized with one another because of a clause found within all three contracts he signed with XYZ Credit Union.  This requires that John Smith keep all three debts current to keep his and his wife’s vehicles protected from repossession.

If I owe a credit union money can I not file bankruptcy?

NO, but what you would pay to the credit union depends on what type of bankruptcy you filed.

Chapter 13 offers more flexibility with handling debts owed to credit unions.  It allows you to pick what collateral you want to keep and surrender the rest.  However, if the collateral you keep is valued more than what you owe on the loan the collateral secures, then there would be some equity in the collateral to secure a portion or all of the other debts you owe to a credit union that would have be paid through the chapter 13 plan as well.

Chapter 7 requires an all or nothing approach when you owe multiple debts to a credit union because if you wish to keep collateral that secures a loan with the credit union by signing a reaffirmation agreement, the credit union will require that you reaffirm all debts that you owe with them to be able to do so.  This is because of cross-collateralization.  You would keep all debts you owe to the credit union and continue to pay for them by signing reaffirmation agreement(s) or you would surrender collateral and get rid of all debts you owe to the credit union.  If you decide to keep all debts, you normally are able to keep all deposit accounts as well with the credit union and maintain your membership.

Set Offs

The credit union has a right to withdraw money from your deposit account to recover any loss that you cause them.  If you have deposit accounts with a credit union (i.e., checking, savings, IRA) and file a bankruptcy that includes a credit union debt, the credit union will freeze your deposit accounts when they receive notice of your filing if you are not paying them in full to recover the loss that your bankruptcy may have caused them.  Therefore, your attorney will advise you to pull all of your money out of the credit union before filing to protect those assets and prevent your money from being frozen.  You can put that money into a deposit account at a bank where you do not have a loan relationship.

You can file bankruptcy if you owe a credit union but it is very important that you discuss the consequences of your credit union relationship before you file with your bankruptcy attorney so that you can select the best option for you… chapter 13 or chapter 7.