Credit Unions and the Automatic Stay
We’re all taught to stop, drop, and roll when it comes to catching fire, but we’re not always taught to stop and freeze all collection activity when it comes to a member who has declared bankruptcy. However, this is a vital and necessary practice for credit unions and their collections department. In this blog, I’ll cover why your credit union needs to watch out for bankruptcy filing notices and what it should do if it receives one.
Under 11 U.S.C. 362, once a debtor files for bankruptcy, an automatic stay is placed on most collection activity against the debtor. This stay prevents a creditor from taking any collection activity against the debtor, sometimes even when the credit union is merely reminding the debtor of their monthly payment (e.g. “your bill is ready” emails). As such, it is important that credit unions be on the lookout for notices that a member has declared bankruptcy.
When a credit union has notice that a member has filed for bankruptcy, the credit union is required to place a freeze on all collection activity associated with the member’s account. Credit unions may want to be careful regarding communications sent to the debtor, as “collection activity” could extend to some communications that the credit union sends to even non-delinquent members. A credit union should generally expect to receive notice in the mail and it should look similar to this notice of Chapter 13 bankruptcy. Credit unions can review notices for other bankruptcy types here (Forms B 309A – B 309I). Please note that these are national level forms and local bankruptcy courts may have different notices. Credit unions may want to check with local counsel if they receive a bankruptcy notice.
Credit unions may also need to notify third parties. For example, credit unions should pay close attention to scheduled repossession and foreclosure actions, as these often involve outside third parties. Once notice is received, all attempts to repossess or foreclose on property of the debtor must cease, including physically repossessing the property, initiating or continuing state court actions, or selling or auctioning already repossessed or foreclosed property. A credit union may still be able to accept voluntarily surrendered property, however, it should speak to local counsel prior to accepting surrendered property as there may be local prohibitions or requirements.
Credit unions should note that if a debtor has filed for Chapter 13 bankruptcy and there is a co-debtor, the automatic stay applies to the co-debtor to the extent the credit union attempts to collect on the joint debt.
Relief from the Automatic Stay
Generally, the automatic stay lasts until the end of the bankruptcy unless otherwise stated in a bankruptcy plan. However, a secured creditor may seek to end the automatic stay early by filing for relief from the automatic stay under 11 U.S.C. 362(d). Relief from the automatic stay could allow a secured creditor to sell, repossess or foreclose on a debtor’s property that the credit union has a security interest in. For example, if a consumer has a secured vehicle loan with a credit union that they have defaulted on, the credit union may seek relief from the automatic stay in order to repossess and sell the vehicle.
Generally, whether a creditor will be able gain relief from the automatic stay is highly fact specific and credit unions should seek counsel from a local bankruptcy attorney for relief from the automatic stay.
About the Author
Keith Schostag joined NAFCU as regulatory compliance counsel in February 2021. In this role, Keith assists credit unions with a variety of compliance issues.