Credit unions are nonprofit institutions that pool members' money to offer banking services and loans. Thus, credit unions consider a member filing or thinking of declaring bankruptcy as a major risk to their operation, according to Bankruptcy Law Network. Credit unions try to avoid doing business with people dealing with a bankruptcy, but they're also cautious to avoid violations of bankruptcy law.
When dealing with a bankrupt credit-union member, the credit union tries to avoid violating the "automatic stay" statute of U.S. bankruptcy code, according to attorney Daniel McGarry. When a debtor files for bankruptcy, he has protection from actions by the creditor that attempt to seize property, levy a lien or file a lawsuit before a discharge (see Resources).
Credit unions generally support legislation that makes it tougher for people to declare bankruptcy because it costs taxpayers—and credit unions—money. During 2001, for example, about half of the estimated $688 million in credit union losses came from members declaring bankruptcy, according to the Credit Union National Association.
A credit union may deny extending further credit to a member who discharges debt during a bankruptcy, according to McGarry. However, this doesn't mean a person who declares bankruptcy can't use the services of his credit union. After the bankruptcy, the credit union can't deny services based only on the fact that the individual declared bankruptcy.
Credit unions tend to "cross-collateralize" their loans. This means that any security that's put against one loan becomes a security for all loans that an individual has at the institution, according to Bankruptcy Law Network. Thus, if someone becomes delinquent on one loan, such as a credit card, the bank could repossess the vehicle that was purchased with an auto loan.
According to Bankruptcy Law Network, those considering filing for bankruptcy should take their money out of their credit union and putting it in another institution to prevent the credit union putting a freeze on their account to offset possible future losses.