Handling The Bankrupt Member Who Has Caused You A Loss

December 18, 2017 at 9:28 am 1 comment

One of the first things I learned in credit union land was that you can deny services to a member who has caused you a loss. Specifically, all a member is ultimately entitled to is a share draft account and a vote at the annual meeting.

One of the first things I learned in bankruptcy law land was that you can’t seek to collect funds against a member who has filed for bankruptcy.

Let’s face it, these two bedrock principles are in conflict. What does a credit union have to tell that member she has to pay back her discharge debts before she becomes eligible for full-fledged membership benefits? This is precisely the question that a bankruptcy court in New York answered in a decision released this past week. It’s worth it for you to keep this one in your file: It’s the first 2nd Circuit case that I have seen dealing with this precise issue and it provides a good template against which to make sure your own policies are being implemented properly.

In re: JACOB R. MORGAN, Debtor., No. 16-61604, 2017 WL 6371349, (Bankr. N.D.N.Y. Dec. 12, 2017) involved a member of the PenFed Credit Union whose debts were discharged after filing for a Chapter 7 Bankruptcy. These debts included payments on a personal loan and some account overdrafts. Under 11 USC 727(b) of the Bankruptcy Code, a debtor discharged under Chapter 7 is relieved of all personal liability relating to pre-petitioned debt. In addition, he also receives the benefit of 11 USC 524(a)(2) under which no creditor can take any actions to recover or offset the discharged debt. Doing so is a violation for which the frustrated creditor can be fined. As many financial institutions know, there is no shortage of attorneys who supplement their income by alleging that the injunction against collection efforts has been violated.

When his debt was discharged our debtor sent an email to PenFed informing the credit union he would like to “rebuild his account.” In response, PenFed informed him that his checking account was closed due to an overdraft and that he had a remaining balance due to the credit union of $500. The credit union informed him that pursuant to policy, any member who caused the credit union a loss is subject to having all accounts and services terminated with the exception of maintaining a regular share account. The member claimed that by making his participation in the credit union contingent on repaying discharge debts, they were violating the law. After all, wasn’t the purpose of bankruptcy to enable members to get a fresh start?

The court answered that question this way: “While any refusal of future services by a pre-petition creditor has some coercive effect, the financial conveniences provided by a credit union to a debtor do not rise to such a level where a threat or conditioning of their withdrawal of services is necessarily coercive.”

The court concluded that required to pay pre-petition debt owed to a credit union in order to reinstate a financial relationship. “Such requirement in and of itself does not equate to improper coercion or harassment. Accordingly, while Debtor may have one less financial institution with which he can do business, the opportunity he received to take full control of his financial future after being granted his chapter 7 discharge is no less promising.”

Entry filed under: Legal Watch, New York State. Tags: , , .

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1 Comment Add your own

  • 1. Gary Roback  |  December 19, 2017 at 9:29 am

    In the first paragraph you state the member is entitled to a vote and a share DRAFT account. Later you stated that PenFed told the member he was entitled to a regular share account. We say the same as PenFed, but is sounds like you are implying that the member is entitled to a draft and not a regular share account. Can you clarify?


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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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