Credit Unions and Bankruptcy: Protecting Your Bank Balance & Cross-Collateralization Agreements
Credit Unions and Bankruptcy: More Than Meets the Eye
Credit unions and bankruptcy are often an uncomfortable mix. Credit unions can be wonderful to deal with as a customer on a day-to-day basis. People like the friendly, personal service they often receive and, to some extent, the notion that they are not simply "customers" but are "members" of the credit union. There is an intimation of fellowship to doing business with a credit union, in other words, and many credit union members who come to me for advice regarding a potential bankruptcy are dedicated fans of their credit unions. That friendly attitude that credit unions project on a day-to-day basis, however, changes dramatically when one of their customers to whom they have extended credit files for bankruptcy. At that point, the credit unions become the tiger in the room. Feelings have run much stronger among the past clients of Michigan bankruptcy attorneys The Hilla Law Firm, PLLC toward credit unions than they have toward banks—as illogical as it may seem for anyone to feel anything emotional toward a non-human financial institution of any sort. "I love my credit union" is a statement that we have heard more than once. Understandably, you may want to keep this "relationship" solid, and your accounts with or debts to your credit union may not be your primary reason for exploring the option of a Chapter 7 or Chapter 13 bankruptcy. However, once you file for bankruptcy, that friendly face at your local branch is not the decision-maker, and you will not receive the same treatment going forward. Virtually every credit union in southeast Michigan utilizes the services of the same one or two law firms who maintain rather standard operating procedures with their credit union clients when representing them in bankruptcy. These creditors' law firms are the entities you will deal with, not your favorite teller at your local branch, when you file bankruptcy.
Credit Unions and Bankruptcy: The Right of Set-Off
There are some legal reasons why credit unions become occasionally tougher to deal with after a Chapter 7 or Chapter 13 is filed, all premised upon the legal fiction that a credit union is a "union" of human members and not simply a corporate entity as a bank is. As a result of this fiction, credit unions operate in bankruptcy and under Michigan state law with slightly different rules than do "regular" banks. First among these differences is something called "the right of set-off." It is very common for potential bankruptcy filers who owe a debt of one sort or another to a credit union to also maintain personal checking or savings accounts with that credit union. In fact, generally, that person has been extended credit by the credit union only with the caveat that they must also open up a checking or savings account with them. Sometimes, these personal accounts have only the $5 or $10 on balance that they were opened with, but, just as often, the account has subsequently been used as the customer's primary daily use account. Unfortunately, this presents a serious problem when it comes to filing for bankruptcy. Specifically, credit unions have the right to set off any funds in your personal accounts with them to compensate for the loss of funds owed to them by your potential bankruptcy discharge. Credit unions are protected in their right to do this by the Bankruptcy Code, and they will typically not wait until you receive your discharge to take your money. There is a danger that, upon receiving notice of the filing, which can happen very quickly in this electronic age, the credit union will remove some or all of the funds in your credit union checking or savings accounts. As a result, it is nearly always best to stop any direct deposits heading toward these accounts prior to filing, relocating them to different or new accounts at "regular" banks to which you owe no debt, and to relocate the majority of any funds sitting in these credit union accounts to the new "regular" bank accounts as well. Of course, we will still list and account for these funds, whether they are in a bank account or (unwisely) stuffed into a coffee can, but, at the time of a bankruptcy petition filing, anywhere is better than in a credit union account if you owe the credit union any money whatsoever. You will, however, want to consult with an experienced bankruptcy lawyer before actually closing accounts prior to filing a bankruptcy.
Credit Unions and Bankruptcy: Cross-Collateralization Agreements
An additional issue with credit unions and bankruptcy is something called a cross-collateralization agreement. What this is is a fine-print term of a checking account, savings account, or credit card or loan agreement that stipulates that all of your accounts with that credit union of whatever sort serve as "collateral" for each other. That is, your crdit union checking account will serve as collateral for, say, a credit card issued by the credit union the same way your car serves as collateral securing the auto loan extended to you for the purchase of the car. What in the world does that mean? It means that a debt such as a credit that may have been easily classified as "unsecured" as most credit cards are normally will instead be argued to be a "secured" debt by the credit union. "Secured" debts have a priority treatment above "unsecured" debts in the bankrutpcy process and may be required to be "reaffirmed" by the credit union along with a genuinely secured, cross-collateralized car loan from the same credit union for a car that you would like to retain. Click here to read more about reaffirmation agreements in Chapter 7 bankruptcy, but the bottom-line is that a reaffirmation agreement is a separate agreement that Chapter 7 debtors sometimes consider signing in order to retain a vehicle, among other sorts of secured-debt collateral. It puts you back on the hook for that particular debt as if you had not filed bankruptcy at all. That is, the debt will not be discharged by the bankruptcy, and, if you default on payments later, the lender can pursue you for collections. If a personal loan or credit card or other unsecured debt is "cross-collateralized" with a secured car loan, the credit union may ask you to reaffirm those unsecured debts along with the car loan in order to retain the vehicle. Such issues may be potentially negotiated to successful conclusion with the credit union's attorneys during your bankruptcy process, but cross-collateralized loans may be a potential source of increased aggravation on your way to a complete Chapter 7 discharge.
Credit Unions and Bankruptcy—The Bottom Line: Consult a Michigan Bankruptcy Attorney Before Filing if You Owe a Credit Union Money
In the Eastern District of Michigan, where The Hilla Law Firm primarily practices, the credit unions are among the only creditors that keep lawyers down at the bankruptcy court all day, every day. When it comes to set-offs of your account balances, cross-collateralization, reaffirmation agreements for auto loans, among other issues, the credit unions become different, more unpleasant creatures than you been accustomed to in the past. Credit union debt and issues involve cross-collateralization and account balance set-offs are one more reason why it is important to retain an experienced Michigan bankruptcy lawyer to help you with your bankruptcy rather than attempting to go it alone. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.