Nearly 200,000 credit union members filed for bankruptcy in 2013 alone, accounting for approximately $1 billion in charge-offs, according to Peer-to-Peer data from Callahan & Associates. This is a significant amount of debt that falls into a different and precarious collection process. Bankruptcy is one of the more common occurrences that can thwart a credit union’s recovery progress; however, if they act quickly, there are measures credit unions can take to maximize recovery.
A Closer Look At Chapter 7 And Chapter 13
The two most common types of consumer bankruptcy filings are Chapter 7 and Chapter 13. Chapter 7 is typically for consumers with little or no assets available for liquidation that wish to eliminate their unsecured debt through the filing process. Chapter 13 is for consumers that have assets they want to protect from liquidation. They might have equity in their home or property and need to restructure their debt to retain as many assets as possible through the bankruptcy process.
Chapter 7 traditionally serves as a method to eliminate unsecured debt with few borrowers actually losing any assets. Chapter 7 bankruptcy does not effectively eliminate debt attached to collateral and the creditor, in most cases, retains a pursuable lien post discharge.
Chapter 13 provides a repayment plan, normally administered through a trustee to be executed over a three- to five-year period. With Chapter 13, there are pre-petition payments that are made through the trustee and set up at the time of filing and disbursed in accordance with the confirmed plan. Post-petition payments can come straight to the creditor from the debtor and not through the trustee, depending on the jurisdiction of the bankruptcy filing. Credit unions want to be cognizant of lien strip motions that are proposed at the time of filing or shortly thereafter. If filed against a credit union’s collateral, make certain to work with an attorney to quickly assess whether it makes sense to contest.
Steps To Take When A Member Files For Bankruptcy
If a member has filed a bankruptcy, all is not lost. There are a few things credit unions can do to secure the ability to recover their funds, but they must act quickly.
As dictated by the stay against the lender, cease all contact with the member regarding the collection of their debt. If the credit union is dealing with a mortgage or a deed of trust and moving to put the property in foreclosure, it will want to retain legal counsel to file a motion for relief from stay in the bankruptcy case before pursuing the foreclosure.
If the member has filed a Chapter 13 bankruptcy, make certain to file a proof of claim prior to the bar date. Act as quickly as possible with regard to the asset category of the debt in an effort to protect the credit union’s interest in the house, car, student loan, or collateral that secured the loan.
Use reporting software like Banko from LexisNexis to ensure constant monitoring of the member’s bankruptcy filing(s).
If the credit union receives a notice of dismissal of the bankruptcy filing and it still has uncollected debt, proceed with the normal collection process to recover the remaining funds.
Once the credit union has received a discharge of the bankruptcy filing, and if the collateral is still secured, proceed with collection processes to resolve and assert the credit union’s rights associated with the remaining secured lien. Make it clear the credit union is not pursuing the member for personal liability
Finally, be fully aware of all the laws and regulations that surround how the credit union should handle bankruptcies based on the member’s current address so the credit union can maintain proper compliance when handling its recovery activities.
If credit unions don’t have the bankruptcy resources or expertise in-house to fulfill one or more of these stages, there are agencies that provide this type of expertise and monitoring services. Finding a reputable agency ensures a credit union doesn’t have to go it alone or construct an entire bankruptcy department for the occasional member filing.
Remember, although bankruptcy filings take patience and expertise, credit unions that correctly handle them can maximize recovery and reinvest the funds back into their community and their productive members.
To receive more information on how to effectively handle collections, email CUinfo@lcsfin.com with the subject line “subscribe.” Download “Best Practices for Successful Debt Recovery: A Collections Checklist for Credit Unions”
About The Author
Debra Engh is the Director of Bankruptcy at LCS Financial Services Corporation and has more than 30 years of experience in the mortgage industry and eight years of bankruptcy and collections expertise. LCS Financial Services Corporation is backed by more than 30 years of receivables management experience. The company maximizes debt recovery for financial institutions nationwide, specializing in the recovery of mortgage, auto, and student loans.
To contact Debra Engh, email CUinfo@lcsfin.com or call 1-888-485-8856. To find out more about LCS Financial, visit www.lcsfin.com.
This information is not to be construed as legal advice. The information contained herein is not intended to be a full and exhaustive explanation of the law in any area. This information is not intended as legal advice and may not be used as legal advice. It should not be used to replace the advice of your own legal counsel. The opinions expressed are the views of the authors alone and should not be attributed to any other individual or entity. Any distribution, reproduction, copying or sale of this material or the contents hereof without consent is expressly prohibited.