The Short Answer
Credit unions come with hidden risks when you file bankruptcy that most people don't see coming. Because you're a part-owner of the credit union, they treat your bankruptcy filing as a financial loss — and will typically close your checking and savings accounts, even if you're keeping a loan with them. Cross-collateralization is another major trap: if you have both a credit card and a vehicle loan with the same credit union, your car could be collateral for the credit card debt, complicating what you can keep in bankruptcy. The one exception where account closure may not happen is if you file Chapter 13 and are repaying 100% of your unsecured debt in your plan.
When it comes to banking accounts and financing a loan, credit unions are often a highly sought-after source for mortgages, vehicle loans, and bank accounts. However, what you may not know about credit unions could come back to have negative consequences against you during and after your bankruptcy.
Credit unions have become a sought-after banking source for many people because they offer competitive banking advantages without some of the hassles and fees of larger banks. Additionally, if you are a member of a credit union, you are essentially a part “owner” of the credit union. You can usually find lower interest rates at credit unions and will usually find much better customer service than a larger, traditional bank because credit unions are non-profit organizations.
There are some down sides, however, to becoming a member of a credit union. Sometimes actually becoming a member can be the most difficult part of the process. Most credit unions have certain requirements for membership – usually the requirements involve being a member of some specific organization or group (e.g. teachers, government employees, school, place of worship, organization, etc.). The membership eligibility requirements will vary depending on which credit union you wish to join, so you will need to contact the credit union for more information on their requirements.
A big trap of credit unions is cross-collateralization, which means that you have both a credit card and a vehicle or home loan with the credit union, and that your vehicle is collateral for the credit card. Cross-collateralization does not always occur, but is very common with credit unions and can have negative implications in your bankruptcy. Read more about the dangers of cross-collateralization here.
Once you do become a member, you may find that you are required to maintain a savings (or “share”) account with a minimum balance in order to also maintain a checking account. Additionally, you will find that ATM machines may be harder to find, particularly if you are traveling to a different state. In order to do your banking, you will usually have to find a credit union branch.
If you become a member of a credit union and later file bankruptcy, there are some repercussions that you will experience as a direct result of your bankruptcy filing. Regardless of whether you file Chapter 7 bankruptcy or Chapter 13 bankruptcy, your credit union will consider the bankruptcy filing a “loss” and will likely close any and all checking or savings accounts you have with the credit union. This is usually the case even if you are going to keep your mortgage loan or vehicle loan through the credit union. The only exception to this rule may be if you file Chapter 13 bankruptcy and are paying back 100% of your unsecured debt in the bankruptcy.
While credit unions are often a better option for folks who are seeking financing due to the lower interest rates, better customer service, and reduced fees, the hidden traps should be carefully reviewed if and when you run into financial hardship.
If you have further questions about filing Chapter 7 or Chapter 13 bankruptcy, contact us today for a free consultation.
Key Takeaways
- Credit unions will typically close all your checking and savings accounts when you file bankruptcy, regardless of whether you file Chapter 7 or Chapter 13.
- Cross-collateralization — where your vehicle secures both your auto loan and your credit card — is far more common at credit unions than at traditional banks and can create serious complications in bankruptcy.
- Even if you plan to keep your mortgage or vehicle loan with the credit union, account closure is still likely unless you are repaying 100% of unsecured debt in a Chapter 13 plan.
- Before filing bankruptcy, you should move any funds from a credit union account to a separate bank account to avoid losing access to your money when the credit union acts on your filing.
- If you have a credit card and any secured loan at the same credit union, review the loan agreement for cross-collateralization language before deciding how to handle that debt in bankruptcy.
- Credit unions' membership-based structure makes them attractive before financial hardship, but that same structure gives them tools to protect themselves that traditional banks don't always use.
Attorney Insight
The mistake I see most often with credit union members is showing up at our first meeting with their only checking account at the same institution where they have a car loan or credit card — and no idea that the credit union can freeze or close that account the moment the bankruptcy filing hits their system. In some cases, people have lost access to their paycheck deposits within days of filing because they didn't move their funds first. The cross-collateralization issue is just as dangerous: I've had clients in the Charlotte and Greensboro areas who assumed they could surrender a credit card debt and keep their paid-down car, only to discover the credit union's loan agreement treated the vehicle as collateral for both. If you bank where you borrow, tell us before we file — it changes the strategy significantly.
