Your Guide To Credit Unions & Bankruptcy

How Are Credit Unions Different from Banks and Other Lenders in Chapter 7 Bankruptcy?

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

Many credit unions use cross-collateralization, which means one loan (like a car loan) may also secure other debts you have with them, such as a credit card or personal loan. This can make it harder to simply wipe out those other debts in Chapter 7, because the credit union may claim the car or other collateral if you don’t pay everything back.

Credit unions are also more likely to require reaffirmation agreements and may even close your membership or credit accounts after you file, while most banks don’t take those steps.

What Is Cross-Collateralization ?

Cross-collateralization means a lender uses one piece of property to secure more than one loan. For example, if you have a car loan and a credit card with the same credit union, the credit union might treat your car as collateral for both debts — so if you fall behind on the credit card, they could still repossess the car.

Cross-collateralization clauses are often buried in the fine print of your loan agreement. 

How Cross-Collateralization Works: Car Loan Example

Let’s say your credit union holds your car loan. When you signed the paperwork, it was probably clear that if you didn't make your payments the credit union could repossess the car, just like any secured debt. What was probably not clear is that the car may 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 -ollateralization 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 by the bankruptcy.  

What Is a Set -Off?

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

For example, if you have a car loan and a checking account at the same credit union, they may pull money from your account if you fall behind on payments or after your debt is discharged in bankruptcy.

This can be especially tough if you rely on direct deposit, since new deposits can be taken as soon as they arrive. Many credit unions also freeze member accounts once bankruptcy is filed, cutting off your access to those funds until the case is resolved.

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 plan on getting an account with a different credit union before filing bankruptcy, make sure to find out whether the act of filing bankruptcy may affect your membership even if you don't have any debts with the credit union. 

How To Deal With Credit UnionJoint Accounts During Bankruptcy

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.

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 Protect Yourself if You Bank With a Credit Union

If you’re planning to file for bankruptcy, it’s important to think ahead about your credit union accounts, since they can freeze your accounts or take (set off) money to cover debts you owe them, even after you file.

Here are some steps to protect yourself:

• Stop direct deposits before filing. Have your paycheck or benefits sent to a different account so money doesn’t land where it can be frozen or taken.

• Move your money. Transfer savings or investments from your credit union to a regular bank account.

• It’s okay to switch banks. Opening a new bank account before filing is common and not a problem as long as you list all accounts in your bankruptcy forms. If you close your credit union account, make sure to get 12 months of statements first, so you have the records you’ll need later.

• Check for cross-collateralization. If you have a secured loan (like a car loan) with the credit union, see if it’s tied to unsecured debts, such as a credit card. In Chapter 7, you may need to reaffirm the credit card debt in order to keep the secured property.

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.

What Are the Benefits of Credit Unions vs Banks?

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.