Interviewer: What is it like dealing with credit unions during bankruptcy? Do they deal with bankruptcy differently than a bank does?
Andrew Campbell: Generally speaking I think credit unions are great institutions that can save people money. As far as bankruptcy goes, they can be tough to deal with.
Credit unions are something that I tell my clients to avoid because if you’re dealing with them in bankruptcy, they’re awful.
I almost never have to deal with banks at all in bankruptcy, but if there’s a credit union account it can be complicated.
Interviewer: Why are they so hard to deal with?
Andrew Campbell: Well if you file bankruptcy and cause your credit union a loss, they will revoke all of your privileges. This means that they will close your account and you will no longer be able to do business with them.
A lot of my clients hear that and take it very personally. The key is to keep your eye on the most important thing, your financial future.
Credit unions have fewer assets that many banks for obvious reasons. They are obligated to really keep an eye on their losses. This causes them to take what most would consider a more aggressive approach to dealing with clients filing bankruptcy.
If you have a bank account at a credit union and owe them no other debt than say a debt on a car loan that you want to keep or reaffirm in bankruptcy, you are good to go.
The problem comes when you have debt that you do not want to keep or that is not in your best interest to keep.
Let’s say for example you have a Visa credit card with $10,000.00 on it and you have also financed a car through that same credit union.
Well, the credit unions will demand that you reaffirm the credit card debt and the car debt as well or you can’t keep the car. They can do that legally because the debt is cross collateralized.
This means if you don’t pay one, then both can become due and owing at the same time. Default on one, you default on the other.
This is why it is so important to review what you sign with the credit union before you sign it. Every single client I tell this to will tell me that they had no idea that they were allowing that right by signing.
So back to the example, I could not recommend a client keep a $10,000.00 debt with a credit union just because they want to keep their car.
For the reaffirmation purposes, both parties must agree and typically that’s not a problem for cars except when a credit union is the one that has financed it. So if you have an auto loan with a credit union and additional debt you might have to think a bit more carefully about how to proceed.
They are difficult to deal with in bankruptcy and that is why I don’t encourage people to use them. To be fair to the credit unions, they do have regulations to follow and taking losses can cause them a lot of issues with regulators.
If you just have an auto loan and do not cause them to suffer a loss, they are good to work with. Of course, you have to be current on your auto loan otherwise most creditors will not want to reaffirm the debt.
Reaffirming a debt simply means to take steps to keep that debt outside the bankruptcy and to essentially re-contract on the same exact terms.
In the scenario above, it is doubtful that a bankruptcy judge would approve a reaffirmation agreement of a large credit card debt and an auto loan debt.
The bankruptcy court also has the authority to review what a reaffirmation agreement to ensure it is in the best interests of the debtor. The Court doesn’t want to put people back in the same position again.
Interviewer: What are some simple rules to improve your credit after a bankruptcy?
Andrew Campbell: I have a complete guide available to my clients on some simple rules to follow after bankruptcy.
Paying on an installment loan, like a car, is probably the best way to improve credit after bankruptcy.
Paying on a mortgage can be helpful but not always. If you have reaffirmed your mortgage debt then paying on your mortgage every month on time can be really helpful.
If you haven’t reaffirmed your mortgage debt, though, payment of that debt will not likely improve your credit score.
This is because credit reporting agencies and creditors are afraid that furnish this information because they believe it will violate the bankruptcy court’s order called the automatic stay.
The automatic stay is an order from the bankruptcy judge sent out at the beginning of your case preventing any collection activity against a person that has filed a petition.
The simple rules of improving your credit are as follows: pay your debts on time. Once you get done with your bankruptcy, any debts that you do get, pay them on time, keep the balances low, and don’t start getting a lot of credit cards or switching credit cards.
The key is to make sure you do care a small balance on your card but pay your bill on time and do not pay it all off.
Some clients find that troubling. They think why can’t I just not have any credit card debt. Well you don’t have to have credit card debt at all but it is one way to improve your credit.
Some people like to take the safer route and get a secured credit card. A secured credit card is where you put down a deposit of say $500.00 and pay an application fee.
The $500.00 is held by the credit card company. This keeps the debt secured. So if you don’t pay, they can simply take the $500.00 on reserve and pay themselves.
This helps people keep their limits low which also limits risk to them.
So if you take this route you would want to keep a balance on that card and pay on it every month on time. Obviously you want to keep the balance relatively low just to be safe.
If you want to shop for this kind of credit card I suggest finding the lowest application fee and check to see if there is an annual payment due. These types of credit card companies don’t make as much off of interest as unsecured credit card companies so that is why the fee is a bit higher.
This can help if you rent a car or hotel room as well.
I have one credit card that I have had since 1992 and every time I call to make a payment they always say to me, “Thank you so much for being a customer for X number of years,” and I’m like, “Oh, wow, okay.”
That is an opportunity as well because that can be used to actually lower interest rates. They value loyalty and in some circumstances they will attempt to keep you as a customer by providing such incentives.
Roughly speaking, thirty-five percent of your credit score is based upon your payment history, thirty percent is based upon the amount of debt that you owe, and about fifteen percent is based upon the length of your credit history.
The length of your credit history is really important. Showing that you have stayed with the same creditor is also important because it shows that you are being responsible.