LEGAL GUIDE
Written by attorney Asaph O. Abrams | Aug 23, 2011

Baby, You're Money: a not-so-concise guide to Credit-Union Pitfalls in Bankruptcy

Intro

Back in '96 there was a flick called Swingers starring Vince Vaughn, and concerning some mates who take an impromptu trip to Vegas. I think I caught it at a theater on King George St., which is in Sydney. What's neat about watching movies in Australia is you can buy cocktails at the snack bar and they're more likely to have balconies. Their rating system is different, perhaps more critical of violence than innuendo. But other than that: same old.

Swingers is known for novelty dialogue: men telling men, "Baby" instead of plain-old "bro" or "dude;" and men telling men, "Money" or "You're Money" in lieu of the usual "Cool" or "You're cool." Very inspiring back then, because 21-years-old, I wasn't very money.

Swingers was written by Jon Favreau, who recently directed Cowboys and Aliens. Perhaps that's telling of man's trajectory from money to bizarre. Anyway, money is what occurred to me in the car the other day.

I don't listen to the radio except when driving (though I play a radio ad on occasion, so I encourage you to tune in at all hours). Now, if the telly favors car ads, radio favors depositories. Nothing visual about banks and credit unions; they fit the medium.

Credit unions are open to member-constituencies with shared commonality. In a member's deposits and withdrawals, he may feel the intimacy intrinsic to an exclusive group. For example, San Diego County Credit Union's membership is limited to a tight-knit 8,295, 186* persons in 3 counties.

San Diego County Credit Union (SDCCU) and Navy Federal Credit Union (NFCU) are 2 popular unions in America's Finest City. Whether you bank with them or not, you're familiar with their FM spots, because your radio is always on so you won't miss my ad. SDCCU recently delivered a rather ticklish promo. In it, a speaker conveys the message of the OTHER banks with a one-word refrain: "Money." The word's repeated as a sort-of evil mantra of a money-grubbing industry, against which stands an enlightened credit union. The latter is not in it for the money. They're loving, they're local, they're for the people. This is very dramatic stuff.

In its ad, NFCU is touted by the predictable voice of the avuncular patriot. It's a mixture of the Smuckers ad man, and a film-trailer voiceover. NFCU is there for its brothers in arms and if you don't bank with them, well... you hate your country.

Now, credit unions differ from banks in their definition as not-for-profit organizations. Yet, not-for-profit is distinct from non-profit or charitable. Profit must still be had to sustain the entity; SDCCU's disavowal of capitalism fails the straight-face test. Navy Fed's heavy-handed promotion would suggest philanthropy, not banking and lending.

Credit Unions In Bankruptcy

In bankruptcy and debt-collection, reality belies the unions' warm & fuzzy self-image. From the debtor's standpoint, credit unions are decidedly more aggressive, and less forgiving, than the OTHER banks [who are (gasp) in it for the money]. A prejudicial treatment of debtors occurs in 2 areas.

  1. Cross-collateralization

What a mouthful. Cross collateralization occurs when a member has a security-interest loan (like for a car), as well as unsecured debts (like credit cards) with the same credit union. If the borrower defaults on a credit card, then the credit union (like SDCCU or Navy Fed) may secure that unsecured debt with the same collateral for the secured auto-loan. If you file bankruptcy, then normally you'd get rid of a credit-union credit-card debt. However, if they also financed your vehicle, then you have a problem if the car is worth more than its loan payoff . In that event, if you wanted to keep the car, the credit-card debt or part thereof would get tacked on to the car loan. Your payoff would increase up to the full value of the vehicle. Had you taken a vehicle loan plus a credit card with one of the Big Bad Banks, that wouldn't happen.

  1. Reaffirmations

Most California bankruptcy-filers can protect $3525 in motor-vehicle equity and also claim a "wildcard" allowance of $23, 250. ** So liquidation is rare and most people keep their cars. Now, if a car is financed, it still gets "included" in the bankruptcy. This means the debt gets discharged. You can walk away from it if you want. For example, if you owe 20 Large on your $10K Ford, then give it back. Because you filed bankruptcy, you won't owe the 10,000 difference. But if your car isn't underwater, or you'd rather keep it, then generally you just... keep it (and pay it off). This is called retain and pay or the cleverly-titled "ride through." If--at a later point--you can't maintain the payments, then you can still walk, because you had previously discharged the debt in bankruptcy.

Now, instead of retaining and paying, you can alternatively "reaffirm" a car loan. Reaffirmation, means the re-signing of the car loan after filing bankruptcy. This may improve credit, but it also puts you back on the hook for the loan. If you later default, you'll owe the difference between the payoff and the fair market value. Not good. But reaffirmations are voluntary and most lenders do not try to compel reaffirmation by making it a condition of retaining the vehicle. San Diego County Credit Union is an exception.*** In fact, once you file bankruptcy, they will no longer accept payments. Unless you reaffirm the loan, they will later repossess it even if you were always current on the loan. It's an area of fairly hot contention, but the bottom line is: SDCCU is not a debtor's credit union. And who isn't a debtor?

Conclusion

What we've learned today is that credit unions are necessarily in it for the money,**** and therefore they are not money in the Swingers' sense of money. _______________ *2010 U.S. Census Bureau tally for San Diego, Orange, and Riverside Counties.

**If claiming (or able to claim) C.C.C.P. section 703 exemptions. Figures are current through April 2013.

***Ford Motor Credit Company likewise acts to compel reaffirmations. There are many ramifications to reaffirmations that I don't address here. You need to retain counsel in regard to the disposition of secured property in bankruptcy.

****There's nothing wrong with making money. But like the great jurist, Judge Judy once said, "Don't pee on my shoe and tell me it's raining." And yes, I know the catchphrase "money" went away around the time Vince Vaughn went from suave to everyman, but that's another story.

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