201511.13
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Credit Unions: Effect of Filing Bankruptcy

How will bankruptcy effect my relationship with my credit union?

Membership

Unemployed young couple with debts reviewing their bank accountsMany Credit Unions have different rules when dealing with people who file bankruptcy.  Credit Unions are different than banks.  Credit Unions are membership non-profit organizations.  You are a member of the organization and own a portion of the organization.  This is why credit unions are able to charge lower fees and pay higher interest rates in most circumstances.

When you file bankruptcy, the policy of some credit unions are to drop you.  However, other credit unions allow you to continue membership so long as you didn’t owe them debt when you file bankruptcy.

On the other hand, if you owe your credit union debt, they are almost certain to drop you if you file bankruptcy.  Again, as a member of the credit union, you are essentially part owner.  By filing bankruptcy, you are causing a loss to the credit union and the other members of the credit union.

Cross Collateralization

Cross collateralization occurs when you have a secured loan with the credit union and take out another loan.   When you take out the second loan, many credit unions will secure the second loan on the previous collateral or property.  For example, when you take out a second loan with a credit union after already having a car loan with them, the credit union will also secure the second loan on the car.  Therefore, to get title to the car, you will have to pay off both loans.

In essence, it makes the second loan a secure loan also.  This affects you in bankruptcy because the second loan will not be discharged in bankruptcy unless you give up the car.  If you want to keep the car and get title to the car after the bankruptcy is complete, then you will have to pay back both loans.

Setoffs

A setoff is when the credit union takes money from your account to pay for debt that you owe them.  If you have money in your checking and/or savings account when you file your bankruptcy case, then the credit union will freeze your account.  Remember, you are similar to an owner of the credit union.  Therefore, your money belongs to the credit union.  The credit union can freeze your account and use it to pay your debts even if you file bankruptcy.