Credit Union’s Application of Automatic Payroll Deductions to Vehicle Loan Violates Bankruptcy Protection

23 May Credit Union’s Application of Automatic Payroll Deductions to Vehicle Loan Violates Bankruptcy Protection

Once a bankruptcy is filed, a credit union may not apply funds received from a bankruptcy debtor’s paychecks by means of an automatic payroll deduction to the payments due for a vehicle loan, according to the Eighth Circuit Bankruptcy Appellate Panel.

In this case, In re Krivohlavek, No. 08-6047 (8th Cir. BAP May 22, 2009), the appeals court reversed a bankruptcy court’s ruling that because the debtor could have stopped the automatic deductions herself, she was ultimately responsible for the loan payments having been made.

The debtor filed bankruptcy on June 25, 2007, and notified the credit union in writing that she desired to stop her $267.98 biweekly paycheck deductions, which were automatically deposited into her credit union savings account. Despite receiving this notification, the credit union continued the deductions. The credit union also continued applying $187.98 of the $267.98 toward payment of the debtor’s vehicle loan. Months later (and over $1,800 later) the deductions finally stopped.
The credit union claimed that in order to stop the deductions, the debtor had to obtain a form from her employer, sign it, and deliver it to the credit union. The debtor did not do this until several months after her bankruptcy filing.
The debtor sued the credit union for violating the bankruptcy protection, but the bankruptcy court denied her claim. However, the appeals court reversed this ruling, holding that there were two steps to the credit union’s actions: the deduction from the paycheck, and the application of the funds to the loan. Even if the deduction from the paycheck was not a violation, the application of the funds to the debtor’s loan certainly was, according to the appeals court.
The appeals court also observed that other courts have held that continuing paycheck deductions after a bankruptcy filing does indeed violate the bankruptcy protection; the court simply did not have to reach that question in this case. It remanded the case back to the bankruptcy court, with instructions to award attorneys fees and costs, along with sanctions, from the credit union to the debtor.
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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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