A credit union is like a bank in that it lends money and allows you to hold checking and savings accounts. However, credit unions differ from banks in a few ways, and having a credit union account when you file bankruptcy can cause some difficulties that you might not foresee.
Credit unions often participate in cross-collateralization. This means that if you have a secured loan with the credit union and you take out another loan, the credit union will use the collateral for your other loan as security for the new loan. Debts that are normally unsecured, like credit card debt, become secured debts when cross-collateralized. For more information about secured debts, see our What is a Secured Debt? article.
Example. John takes out a loan from Credit Union to buy a car, putting up the car as collateral for the loan, which makes it a secured loan. A year later, while still paying on his car loan, John opens a credit card account with Credit Union. Using cross-collateralization, Credit Union secures the credit card with the car.
Secured debts are treated differently in bankruptcy than are unsecured debts. So it's important to know if your debts are secured by cross-collateralization. (To learn more about how this works, see Credit Union Cross-Collateralization & Bankruptcy.)
A setoff occurs when you owe money to the credit union but also have a checking or savings account with that same credit union and you file bankruptcy. If you have money in your checking or savings account with the credit union at the time that you file your bankruptcy petition, and you also owe money to the credit union for a credit card or other debt, the credit union may have the right to the money in your checking or savings account. The bankruptcy filing will cause the credit union to freeze your account and, if you do not pay back the debt, take the money from the account to the extent that it satisfies the debt.
Example. John has a credit card with Credit Union; the card has a balance of $5,000. John also has his checking account with Credit Union. John files for Chapter 7 bankruptcy protection. At the time he files his bankruptcy petition, he has $2,500 in his checking account. Credit Union freezes the account, which means John cannot withdraw any of his money. John decides to discharge his $5,000 credit card, so Credit Union takes the $2,500 from John's checking account as a setoff for the debt.
Credit unions are membership organizations; when a member files bankruptcy and discharges debt owed to the credit union, the credit union considers that member to have put the other members in jeopardy. Because of this, if you file bankruptcy and have debts with a credit union in addition to your checking or savings account, the credit union will no longer allow you to be a member unless you agree to pay back the debts.
Example. John has filed Chapter 7 bankruptcy. He has a checking account with Credit Union; he also has a credit card and a car loan through Credit Union. His car is too expensive, and he cannot afford to repay the loan or the credit card debt, so he discharges them in his bankruptcy and gives up the car. Credit Union terminates John's membership, and he can no longer bank with Credit Union.