Credit Unions and Bankruptcy: What You Need to Know

Credit unions operate differently than banks in Chapter 7 bankruptcy. These differences can create extra challenges for you.

Cross-collateralization can tie your car loan to unrelated debts like credit cards. Credit unions can pull money directly from your accounts through set-offs. They may even revoke your membership after you file.

You can protect yourself by taking action before filing. Move your money to a regular bank account. Check whether your loans are cross-collateralized. Understanding these risks helps you prepare properly.

How Credit Unions Differ from Banks in Chapter 7 Bankruptcy

Credit unions handle debts differently than banks or finance companies during bankruptcy.

Many credit unions use cross-collateralization. One loan may secure multiple debts you have with them. Your car loan might also secure your credit card or personal loan.

Your unsecured debts become harder to discharge in Chapter 7. The credit union may claim your car if you don’t pay everything back.

Credit unions often require reaffirmation agreements. They may close your membership or accounts after you file. Most banks don’t take these steps.

Understanding Cross-Collateralization

Cross-collateralization means a lender uses one asset to secure multiple loans.

Your credit union might use your car as collateral for both your auto loan and credit card. They could repossess the car if you fall behind on either debt.

Credit unions bury these clauses in fine print. You may not realize you agreed to this arrangement.

Car Loan Example: How It Works

Your credit union holds your car loan. You knew they could repossess the car if you missed payments.

What you probably didn’t know: your car also secures other credit union debts. Your car backs your credit cards and personal loans too.

Credit unions typically offer reaffirmation agreements to members. Cross-collateralization complicates this process significantly.

Your credit card debt changes from unsecured debt to secured debt. Your car now backs the credit card balance.

You face a difficult choice in bankruptcy. Want to discharge the credit card? You must surrender the car. Want to keep the car? You must reaffirm the credit card debt.

Understanding Set-Offs

A set-off happens when a credit union takes money from your account to cover debts you owe.

You have a car loan and checking account at the same credit union. They can pull money from your checking to cover missed car payments.

Credit unions can use set-offs after your debt is discharged in bankruptcy. Your direct deposits become vulnerable immediately upon arrival.

Many credit unions freeze member accounts once you file bankruptcy. You lose access to your funds until the case resolves.

Risk of Losing Your Membership

Credit unions can revoke your membership if you file bankruptcy. They can also revoke it if you default on any obligation.

Revocation means losing access to all your accounts. You keep access only if you agree to repay the debt.

Planning to join a different credit union before filing? Ask whether bankruptcy filing affects membership status. Some credit unions penalize bankruptcy filers even without outstanding debts.

Handling Joint Accounts During Bankruptcy

You share a credit union account with someone not filing bankruptcy. Inform them before you file Chapter 7.

Remove their funds from the account before filing. Your action prevents them from losing money to set-offs.

Your trustee may ask questions about withdrawals. Keep detailed records of all transactions.

The joint account holder’s membership should remain intact. Their status depends on having independent membership beyond your joint account.

Protecting Yourself Before Filing Bankruptcy

You’re planning to file for bankruptcy with credit union accounts. You need to think ahead about potential problems.

Credit unions can freeze your accounts immediately after filing. They can take money to cover debts through set-offs. You can prevent these problems with smart planning.

Here are essential steps to protect yourself:

• Stop direct deposits before filing. Send your paycheck or benefits to a different account. Prevent money from landing where it can be frozen or seized.
• Move your money out. Transfer savings and investments to a regular bank account. Protect your funds from immediate seizure.
• Switch banks without worry. Opening a new bank account before filing is normal. List all accounts in your bankruptcy forms. Close your credit union account after getting 12 months of statements first.
• Check for cross-collateralization. Review whether your secured loan ties to unsecured debts. You may need to reaffirm credit card debt to keep your car in Chapter 7.

Need help navigating these complex decisions? You can speak with a bankruptcy attorney for free to discuss your specific situation.

Benefits of Credit Unions vs Banks

Many people join credit unions for banking advantages. Credit unions function like banks but with fewer hassles and lower fees.

Membership gives you an ownership interest in the institution. You enjoy lower interest rates and better customer service.

Credit unions often provide the best loan opportunities. Many people find approval easier than at traditional banks.