Compliance Question of the Week

We just found out a member has filed for bankruptcy. What should we do?

The credit union should immediately notify its bankruptcy attorney.

Credit unions should take the following steps when they receive notice of a bankruptcy:

Chapter 7 Bankruptcy

  • Freeze all existing deposit and share account balances that are direct or indirect security for outstanding loans (Do not seize or apply deposits without judicial approval).
  • Terminate/freeze all lines of credit and credit card accounts.
  • Place a notice of bankruptcy status on the Data Processing (DP) system and ensure that all staff members dealing with the membership are aware of the member’s bankruptcy status.
  • Determine whether there are sufficient assets to support the member’s debt, in part or in whole.
  • Determine if there are applicable cross collateralization clauses. (If so, the collateral secures all obligations.)
  • File a proof of claim within the time period applicable.
  • Provide the court with the credit union’s preferred address for all correspondence.
  • Attend the first meeting (341) of the creditors.
  • Observe the Automatic Stay and cease all collection efforts against the member.
  • Determine the status of any required insurance. (Take action to request a lift of the Automatic Stay if insurance is not adequate and in place.)
  • Determine if all principal payments are sufficient to offset any continuing collateral depreciation. (Take action to request a lift of the Automatic Stay if principal payments do not cover or exceed depreciation amounts.)
  • Start collection efforts against joint borrowers or co-debtors, if any, unless they have also filed for bankruptcy. (Creditors are permitted to collect from co-debtors when another files for bankruptcy relief.)
  • File any reaffirmation agreement promptly with the court.

Chapter 13 Bankruptcy

  • Freeze all existing deposit and share account balances that are direct or indirect security for outstanding loans. (Do not freeze share draft accounts or seize or apply deposits without judicial approval to lift the Automatic Stay.)
  • Terminate all lines of credit and credit card accounts.
  • Place a notice of status on DP system and ensure that all staff members dealing with the membership are aware of the member’s bankruptcy status.
  • Determine if there are applicable cross collateralization clauses. (If so, the collateral secures all obligations.)
  • Make a preliminary determination and assign the value of the collateral, if any.
  • File an accurate proof of claim, within the time period applicable.
    • A copy of claim should be mailed to the debtor’s attorney and trustee;
    • Two copies of the claim, along with a cover letter and a self-addressed, stamped envelope, should be mailed to the Bankruptcy Clerk’s office, along with a request that the Bankruptcy Clerk send file stamped copies of the claim back to the credit union. The credit union should follow-up if a copy of the claim is not received within 10 days.
  • Provide the court with the credit union’s preferred address for all correspondence.
  • Attend the first meeting (341) of the creditors.
  • Observe the Automatic Stay and cease all collection efforts against the member and any co-debtors; the Automatic Stay applies to them for this type of filing.
  • Determine the status of any required insurance. (Take action to request a lift of the Automatic Stay if insurance is not adequate and in place.)
  • Determine if all principal payments are sufficient to offset any continuing collateral depreciation. (Take action to request a lift of the Automatic Stay if principal payments do not cover or exceed depreciation amounts.)
  • Determine if debtor has any equity in the collateral. (Take action to request a lift of the Automatic Stay if the debtor has no equity in the collateral and the collateral is unnecessary for the debtor’s livelihood or effective reorganization.)
  • Apply payments received first to any interest allowed under the Chapter 13 plan, then to principal, collection expenses, and interest receivable prior to the filing of bankruptcy, in that order.

Credit unions should not:

  • Convert or transfer shares and deposits without a lifting of the Automatic Stay or discharge.
  • Continue actions to repossess collateral without a lifting of the Automatic Stay or discharge.
  • Take any action to collect from co-signers or co-borrowers prior to discharge.
  • Sell repossessed collateral without a lifting of the Automatic Stay or discharge.
  • Contact the member directly when represented by counsel.

What strategies can credit unions use in dealing with bankruptcies?

Inform (directly, or through the member’s attorney if represented) the member about:

  • The credit union’s loss policy (by mail, phone or in person)
  • The benefits of continued credit union membership. The Consumer Federation of America surveys show that consumers save, on average, $300 to $400 per year by conducting all of their financial business with a credit union rather than a bank.
  • The adverse impact of bankruptcy on their ability to obtain future credit. (Some debtors do not understand, or receive incorrect advice from an attorney on their ability to obtain additional loans after the Bankruptcy Court discharges their other obligations.)
  • The costs of obtaining a loan after a bankruptcy. For instance, even though some high-risk auto dealers will lend to individuals with recent bankruptcies, there are usually conditions. These conditions may include requiring one or more cosigners; unusually large down payments; a credit history of 2 or 3 car loans successfully paid; additional collateral, such as real estate; or the worst and most common, extreme interest rates. (Some starting at 22% or more.) An example of this might be: The 14% difference between 22% and 8% for a $10,000 car loan for 60 months is $4,405. (It might be better for the member to reaffirm their credit union debt(s) and continue their current rate.)

A credit union may:

  • Attempt to enforce any lien it has against the debtor after discharge.
  • Seek written reaffirmation permitting members to cancel the agreement during the 60-day rescission period.
  • Require the credit union attorney or credit union staff to attend the first meeting of creditors (341 meeting) to discuss: your collateral, reaffirmation or objection to discharge resulting from: fraud or willful and/or malicious injury to your collateral.

Members are permitted to make voluntary payments on their debts. However, at a minimum, credit unions should send a notification letter or have the member resubmit payroll deduction forms.

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance.