Credit Union Automatic Deductions & the Automatic Stay

01 Jun Credit Union Automatic Deductions & the Automatic Stay

Automatic payroll deductions and filing bankruptcy don’t mix. Payroll deductions help banks and credit unions guarantee as long as you work, you pay them. What happens when you file bankruptcy?

The bank should think twice about continuing to “accept” these payments. That’s the lesson from a 2009 Eighth Circuit Bankruptcy Appellate Panel decision.

The credit union — after being told about the bankruptcy and the automatic stay — refused to stop the deduction. The deduction was deposited to a savings account then primarily applied to a loan automatically. They insisted that a specific form be used or they would not stop it. [Just a word to the wise banker: When offering to obey the law only if your special form is used, your lawyers will be unhappy with you!]

When the borrower demanded his money back after filing bankruptcy, the credit union refused, and argued 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). While the first judge agreed, the appellate panel didn’t buy it.

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 responsible 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, 405 B.R. 312 (8th BAP. 5/22/09)

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:
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