Credit Union Automatic Deductions & the Automatic Stay

Banks and credit unions love to have automatic payroll deductions from their customers.  It helps them guarantee as long as you work, you pay them.  What happens when you file bankruptcy?

The bank or credit union should think twice about continuing to “accept” these payroll deductions.  That’s the lesson from a recent Eighth Circuit Bankruptcy Appellate Panel decision.

In the particular case, the credit union after being told about the bankruptcy filing and the automatic stay, refused to stop the deduction (which was being deposited to a savings account then primarily applied to a loan), insisting that a specific form had to be filed with them before the deduction could be stopped.   When the borrower demanded the return of the money deducted after the case was filed, the credit union refused, and argued to the judge that the payments were voluntarily made – since the employee was always in charge of voluntary deductions coming out of their paycheck (even though the credit union apparently had the power to advise the payroll department to stop).  The appellate panel didn’t buy this argument.

The BAP concluded the credit union not only violated the automatic stay but was liable for, at a minimum, the amounts applied to the loan after the case was filed as well as the debtor’s attorney fees — not only for fighting in bankruptcy court but also in the appeal.

The BAP noted that the debtor had authorized a deduction and deposit into her savings account.  Even if she retained complete control over this and the credit union was not truly responisble for this, the credit union did control what happened next — the funds were deducted from the savings account and applied to the loan.  Taking this action was the active step triggering a violation of the automatic stay, even if none of the other conduct were found to not be a violation.

The idea here is a simple one for both sides: First, if you are a lender and have one of these payroll deduction arrangements, be very cautious.   The consumer may well want to keep paying — but you can’t assume this simply because the money keeps coming in.  Particularly if you apply the money to a loan.  Get that understanding affirmatively stated in writing from the debtor and/or their lawyer.

And if you have a payroll deduction going to a bank or credit union, that’s your money, you have control of it, you can stop it.  And if you are filing bankruptcy and do not intend to continue to repay that loan, help yourself out and get it stopped.

Filing bankruptcy is about taking back control of your life and your future.  This is a good first step.

See, Krivohlavek v. Boys Town Federal Credit Union, #08-6047 (8th BAP. 5/22/09)