[00:00:00] BOCU AI Voice: Welcome to Banking on Credit Unions, your leading law podcast dedicated to credit union matters. Hosted by Jim Sorensen from the elite team at SVL Law, where they specialize in collections, bankruptcy, and foreclosure law designed for credit unions. From landmark cases to innovative legal strategies, Banking on Credit Unions podcast is here to shine a light on the legal pathways impacting your credit union.
[00:00:21] If you want to uncover legal insights designed just for you, listen and join the conversation. Let’s get started.
[00:00:40] Blair Boyd: Good afternoon, Jim. It’s great to be able to sit here today and talk with you about the effect a member filing bankruptcy has on the credit union’s collection department. So you can best protect yourself a credit union. So welcome to Banking on Credit Unions. I’m Blair Boyd and I’m here sitting down with my partner, Jim Sorenson.
[00:00:58] we discuss the credit union industry [00:01:00] and the issues and challenges facing them in an ever-changing environment. It’s our first episode with content. How are you feeling, Jim?
[00:01:06] Jim Sorenson: I’m feeling good. I’m excited. I’m excited to kick this off. Been wanting to do a podcast for a while, and I’m excited that you and I are kicking it off first.
[00:01:15] You are the lucky partner in the firm to get to join me and be here on the first episode. We’ll set the bar high for everybody else from here on out.
[00:01:23] Blair Boyd: There we go. Now I wanna remind everyone, go to our website. It’s SVLLAW.com, where you can find all of the episodes, these episodes, as well as a host of other information on our law firm.
[00:01:34] So, back to the show. Today we’re talking about bankruptcy and so you can best protect the credit union. Let’s just dive in. Quick, Jim, give us like a little quick overview of what bankruptcy is.
[00:01:45] Jim Sorenson: Yeah. So bankruptcy is a process whereby a person is able to deal with debts they’re unable to pay.
[00:01:54] In a broader deeper sense, the US Constitution actually provides for [00:02:00] a bankruptcy process. That process is codified or written down in federal law. It’s known as Title 11 and that is where you find it in the US Code, and it’s a law that is set up to deal with borrowers, both individuals and businesses who have accumulated debt and are having trouble paying that debt.
[00:02:20] And the bankruptcy laws provide how a borrower is able to either file bankruptcy and do what we call liquidating bankruptcy or file what’s known as a reorganization bankruptcy.
[00:02:33] Blair Boyd: Alright. So are there different types of bankruptcy in which ones are the credit unions most likely to see?
[00:02:39] Jim Sorenson: Yeah, so there are different types of bankruptcies. There are chapters, most people who probably are listening to this podcast. Have heard of the these before, at least, even if you’re not involved in bankruptcy matters at a credit union or you haven’t dealt with bankruptcy matters, you know that bankruptcy chapters, we’ve heard it in the news.
[00:02:57] So the one that you hear in the news a lot is a chapter [00:03:00] 11. That’s what typically bigger businesses file, although individuals can but they go in order. So it’s chapter seven, that’s probably the most common, especially in Florida. We see more chapter sevens than we do the rest in the credit union industry, Georgia would be a little different.
[00:03:16] Those are chapter thirteens. There’s a chapter nine that deals with municipalities and in governmental entities that file bankruptcy. We don’t deal with those credit unions don’t deal with those. Those are rather rare. There’s the chapter 11 I’ve already mentioned. Then there’s a chapter 12 that is not as broad, but it’s for family farmers and fishermen.
[00:03:37] And it’s limited to a certain type of debtor who’s in the industry of what’s called a family farmer, or a fisherman. There’s specific definitions under the law. The two we normally deal with in representing our clients and what most of our credit union clients deal with are chapter sevens, and Chapter thirteens, and those are usually in the consumer context, meaning individuals filing bankruptcy, [00:04:00] not in the commercial or business setting.
[00:04:02] Blair Boyd: Yeah. So what is the first thing most important thing a credit union can do when they’re become aware a member has filed bankruptcy?
[00:04:09] Jim Sorenson: Yeah, so the first thing that the credit union needs to do when they learn that a member borrower has filed bankruptcy is they need to immediately.
[00:04:19] Take action to stop any event or any actions from happening that could violate what’s called the automatic stay. This includes everything from stopping the mail, to stopping litigation, to stopping collection efforts, repossessions and the like. So making sure that the credit union has a process whereby once a debtor informs the credit union that they have filed bankruptcy or the credit union receives notice of the bankruptcy. That process kicks in and those things stop.
[00:04:51] Blair Boyd: So the automatic stay, that’s the big thing. What is there a difference in the automatic stay between a chapter 13 and a chapter seven?
[00:04:58] Jim Sorenson: There is. So, in both [00:05:00] of ’em, there’s the automatic stay. I’ve mentioned that. Think of it like an automatic injunction. This is something that prevents the debtor, or excuse me, prevents the creditor, in this case, the credit union, our clients from being able to take action to enforce a debt to recover collateral those types of actions is what it prevents.
[00:05:20] And so the automatic stay happens automatically when the debtor files bankruptcy, hence the name, it’s real creative. It’s a real creative name. But there are differences. In a Chapter 13 and also in a chapter 12, there is what’s called a co debtor stay. So in a normal bankruptcy, if we’re gonna refer to a chapter seven as a normal bankruptcy and a Chapter 11.
[00:05:42] The automatic stay only protects, the person or the entity that filed bankruptcy. So if I filed bankruptcy and Blair and I have a debt together, the bankruptcy filing would protect me, but it would not protect Blair who would be [00:06:00] a co borrower or co obligor on that debt. But if I had filed a chapter 13 bankruptcy, there is a code editor stay, and that code editor stay protects non-filing co debtors who are on a loan or debt with me if I’m the filer.
[00:06:17] So in the example I just gave, if I file a chapter 13 and Blair and I have a debt together, Blair is also protected. So again, the co debtors stays exist in chapter thirteens and chapter twelves. They do not exist in sevens or elevens.
[00:06:33] Blair Boyd: So what advice would you give if a member that has filed bankruptcy has funds in a checking a savings account?
[00:06:40] Jim Sorenson: This is a question we get a lot, they from our clients, I know you field this question a lot, but our clients will call in and or email us, reach out and they’ll say, John Doe has filed bankruptcy, and they owe us this amount on this loan and this amount on this loan, but they have a thousand dollars in their account. [00:07:00] It’s never a round number.
[00:07:01] For example, I’ll say a thousand dollars, they have a thousand dollars in an account. Can we take that money and apply it to the loan? And so that’s the typical question we get right?
[00:07:13] In that scenario, the answer to that, which people who know me and have heard me talk before will know what about I’m about to say is I’m gonna say what you can do with that money depends. If that money is in an account belonging to John Doe, the person who filed bankruptcy, then that money is going to be protected.
[00:07:33] And so in that situation, the automatic stay would prevent the credit union from being able to set off against those funds in that account. Yep.
[00:07:43] But the follow-up question becomes, can we freeze the funds? We know the debtor has filed bankruptcy. We know we cannot take that a thousand dollars and apply it to the outstanding personal debt they have, or whatever you wanna call it, holiday loan et cetera.
[00:07:59] We know [00:08:00] we can’t do that, but can we place a hold on it? Can we freeze those funds? And the answer to that again is it depends. There’s not a simple yes or no. You may be able to freeze the funds if those funds are pre-petition funds, meaning funds that were in the account prior to the bankruptcy filing and those funds, and the debt is in default.
[00:08:23] So in other words, in order to freeze that thousand dollars in the account, that thousand dollars would’ve had to been in the account prior to the bankruptcy filing and the debt we’re trying to set off a against would have to be in default.
[00:08:38] If the debt is not in default, then we could not then our client could not freeze those funds pending relief from the stay in order to be set off against those funds.
[00:08:49] BOCU AI Voice: Do you like what you’ve heard so far? Make sure you never miss a show by clicking the subscribe button now. This podcast is made possible by listeners like you. Thank you for your support. Head on over to [00:09:00] SVLLaw.com and subscribe to our email list to have it delivered right to your inbox. Now back to the show.
[00:09:07] Blair Boyd: Alright. And in this day and age with, car loans going to default at a rapid pace, what should the credit union do if they’ve got in the process right now of repossessing a vehicle and they are made aware that the members filed bankruptcy?
[00:09:20] Jim Sorenson: Yeah. So this is one that’s going to depend on what state you’re in. So one of the things that is aggravating to our clients, and you see this all the time and you hear this Blair, you know this is that while bankruptcy law is this federal law, and it’s really more of a procedural law, it’s a process law, it interacts with state law.
[00:09:43] So what defines certain rights of creditors and debtors is really state law. So the interaction of state law causes sometimes the answer to a bankruptcy related question to differ whether we’re in Florida or Georgia to give an [00:10:00] example, and I’m using those two states ’cause those two states are the states that I’m licensed in and I practice in regularly.
[00:10:07] In Florida, the way the law works is if the car is repossessed prior to the bankruptcy filing, then the car belongs to the credit union. If the car is repossessed after the bankruptcy filing, then the car has to go back to the debtor. That repossession is improper and would violate the automatic stay.
[00:10:30] In Georgia, it’s a little bit different in Georgia, if you repossess the car and the debtor files bankruptcy, and it is a chapter 13 where they are seeking a reorganization, then the debtor has a right to demand a return of the car and the creditor must return the car, and they can do that up until the point of sale.
[00:10:52] And so in Georgia, it’s different in most states around the country. Follow the Georgia rule, not the Florida rule. . [00:11:00] And so Florida and Alabama are the two kind of exceptions. And as far as I know, the other 48 states follow the Georgia rule. It may not be 48, it’s a high number. And and most of the time when we’re dealing with out-of-state clients who have a debtor filing bankruptcy in Florida. They’re not aware of the uniqueness of Florida law and the fact that they don’t have to give the car back.
[00:11:23] Blair Boyd: Yeah, that’s a good thing in Florida. Now, I get this all the time. Member files and they’ve got a bunch of accounts that they’re discharging. Is the credit union allowed the to deny them services as a member?
[00:11:34] Jim Sorenson: Yeah, so this is a common question and we all know if you’re in the credit union industry, credit unions are unique and that we are cooperatives. And part of being a cooperative is this idea of membership and denying membership who two members or two people who cause the membership or the credit union a loss since the credit union is owned by members.
[00:11:54] If a member causes the credit union a loss, out outside of the bankruptcy context, you can generally [00:12:00] deny membership or deny services. In the bankruptcy context, that is true as well. You can deny services, you can deny losses where credit unions need to be careful and is in how that is communicated with the borrower member who’s in bankruptcy.
[00:12:17] You don’t want that letter to read in such a way. If you’re sending a letter notifying a member that they’re being denied services, or their membership is being terminated. You don’t want the letter to read in such a way that it could be construed to be a violation of the automatic stay because it’s construed as a collection attempt.
[00:12:37] If the debtor is represented by an attorney, especially in Florida, we would ha we would recommend that letter go through their attorney. And not directly to them. There’s an argument that communicating with the debtor directly who’s represented by an attorney could violate the Florida Consumer Collections Practices Act.
[00:12:54] So you don’t want to do that. But to go back to your question and answer it simply, [00:13:00] which is sometimes hard for us lawyers to do is yes, you can terminate membership or deny services to a member, even a member in bankruptcy.
[00:13:10] Blair Boyd: And we’d be happy to review any letters if you have any questions that on that.
[00:13:14] Now, in this day and age, when everybody’s online, what should a credit union do when a member has automatic payments set up on, say, a car loan?
[00:13:22] Jim Sorenson: Yeah that’s a that’s a great question, Blair. And what our advice is there’s some conflicting case law out there, and so what we suggest is exercising some caution if you have a member who files bankruptcy and their loan is on automatic payment, what you want to be sure of is that you have some indication that the debtor intends to continue to pay that debt.
[00:13:46] The law does not always view those automatic payments as voluntary payments. We know in the industry we think that ruling or some of those rulings don’t make sense. They’re silly because the borrower can stop the [00:14:00] automatic payments, if it’s a payroll, if it’s a payment coming from their paycheck, they can go to their employer or the payroll company and stop those.
[00:14:07] Sometimes the debtor forgets, sometimes the payment is set on an auto pay from an account they have at another financial institution and they forget about it, and the payment transfers after filing bankruptcy and then they want the payment back.
[00:14:20] And if the credit union doesn’t give it back, that can lead to a legal challenge. So our advice is if you have a loan on automatic payment, don’t continue to process those payments, or allow those payments to post to the loan until you have some indication, some acknowledgement that’s what the debtor intends to do.
[00:14:40] Now, that acknowledgement can come in many forms. Sometimes the members are filing bankruptcy. They don’t want to upset their relationship with the credit union, so they’ll tell the credit union ahead of time, I’ve had some medical debts, I’ve had some business debts, and I’m gonna have to file bankruptcy.
[00:14:55] I want you to know I intend to continue to pay my auto loan on payroll direct [00:15:00] deposit. If you have that indication and conversation and we’ve notated that in the file, hopefully the person’s having that conversation with the member is notating it for a file then that can be sufficient. If you get a letter from the debtor or from their attorney saying they intend to continue to pay the loan.
[00:15:18] Or if their bankruptcy documents indicate that. And we can go to the bankruptcy records and you can look to see that they filed a statement of intention that says they intend to continue to pay for the car, or they wish to reaffirm.
[00:15:33] Or if it’s a Chapter 13, their plan of reorganization in a Chapter 13 indicates that they intend to continue to pay the car directly.
[00:15:40] Now, if the chapter 13, of course, says they’re gonna pay through the trustee, then we know those payments shouldn’t be coming to us. So we probably need to the recommendation of course would be to stop those payments. If necessary, we need to notify the debtor’s lawyer so that they can do whatever they need to do to stop those payments so that the debtor can fund their plan.[00:16:00]
[00:16:00] BOCU AI Voice: Do you like what you’ve heard so far? Make sure you never miss a show by clicking the subscribe button now. This podcast is made possible by listeners like you. Thank you for your support. Head on over to SVLLaw.com and subscribe to our email list to have it delivered right to your inbox. Now back to the show.
[00:16:18] Blair Boyd: Okay. I know we’ve discussed the automatic stay and things that actions that could be construed as a violation of the automatic stay, but tell us, in a practical sense, what is a violation of Automatic Stay? What can happen when that occurs?
[00:16:32] Jim Sorenson: Yeah, so, a violation of the Automatic Stay is simply taking an action to collect a debt, or taking an action to enforce a debt or taking an action to recover collateral or continuing with an action. And those actions can be everything from sending out collection letters to proceeding with a lawsuit, to continuing to try to repossess a car, continuing with a foreclosure.
[00:16:58] Those are the things, [00:17:00] normally what we see most of the allegations of client a credit union violating the automatic stay is typically a letter goes out. It’s usually a mistake. There’s someone made a mistake sure. Someone forgot to make the appropriate change in the computer software or flagged the account.
[00:17:17] And a letter goes out that says, Hey, borrower, you’re late on this loan, and if you don’t pay, this is gonna happen to you. It’s the typical letters that go out, and that letter just happens to go out to a borrower after they file bankruptcy. That is a violation of the automatic stay, and when you have a violation of the automatic stay.
[00:17:35] The question of whether you are gonna get in trouble really does depend upon whether or not you had knowledge of the bankruptcy at the time you took the act. Whether or not the action taken was intentional, certainly if you can establish that there was a computer glitch or computer error.
[00:17:55] You may not be liable for anything but the court can award[00:18:00] damages to the debtor, the court can require the creditor to pay attorney’s fees to the debtor. And and if it’s bad enough, it can become quite expensive and quite embarrassing, or troublesome to the credit union.
[00:18:13] Blair Boyd: Yep. What’s the most extreme case you’ve seen?
[00:18:15] Jim Sorenson: Well, The most extreme case we’ve had that I’ve had, and I think it’s true probably every lawyer in the firm was, we had a client who had years before the bankruptcy hired a lawyer. Not us, not our law firm, another law firm. And that lawyer was working the account.
[00:18:34] To be honest, I think the credit union forgot about the account, forgot that it had been assigned to this lawyer. It had been assigned several years earlier, and there had been some changes in the management at the credit union, changes in the leadership in the collection department.
[00:18:47] So I think this account fell by the wayside, but what happened was the debtor contacts the lawyer who’s representing the credit union and says, Hey, I filed bankruptcy. And whether [00:19:00] or not this part is a little fuzzy, but whether or not that law firm just made a mistake or chose to ignore that call, the collection attempts continued. This law firm was calling. They were really acting like a collection agency, and so the debtor sent a letter.
[00:19:17] And unfortunately, it continued there was a original notice. Again, how much of it was intentional versus, but when the debtor filed this, filed a motion in the bankruptcy court to put this, to stop this and to punish the credit union and its lawyer for violating the automatic stay, the judge looked at what was, what had happened, and decided to make an example of the credit union.
[00:19:44] Blair Boyd: It’s never good.
[00:19:45] Jim Sorenson: And no, it’s not good. And so there was an order to show cause issued, which is an order for someone to appear in court, and the order to appear in court in front of the federal bankruptcy judge was the credit union, CEO, and their lawyer.[00:20:00]
[00:20:00] And I got the call to go down there with the CEO. This was in Fort Lauderdale bankruptcy court, and it proceeded to take the brunt of the beating for the client. Even though the client really had not done anything wrong in that case was not aware of it. And there was even an argument that the initial notice that went to the credit union wasn’t a valid address.
[00:20:21] The judge really didn’t want to hear it. The fact is they had a lawyer who was collecting the debt. The credit union viewed dead lawyer and the credit union the same. And of course, I was the one representing the credit union. The lawyer was there. So he got chewed out. I got chewed out. The credit union had to pay a nice amount of money to the debtor and her lawyer.
[00:20:41] And we left thankful that none of us ended up in jail. And that was by far the worst that I’ve been involved in. The other story that I’ll tell and I saw it happen, I happened to be in court. It wasn’t my client, I wasn’t involved in the case, but it was a situation where, and this person was pro se and[00:21:00] she owned a small buy here, pay here car lot.
[00:21:03] This was in Georgia and a long time ago. And she had repossessed the car. The debtor’s lawyer contacted her, said, Hey, you have to give it back. She said, no, I don’t. He sent her a follow-up letter trying to explain the law. She refused. The judge issued an order telling her to give it back, she refused.
[00:21:21] \And now there was an order to show cause and this woman was in court telling the judge, why he was wrong. And yeah, that one did not end well. I think she pretty much needed bankruptcy court when the judge was done with her. That was one I was glad I was not up on representing her.
[00:21:36] And not the one taking that’s being chewed out by the judge. So these can get serious. And even, they’re just nuisances for our clients, even the ones that are small or nuisances for our clients. The moral of the story is make sure you have a good process in place.
[00:21:51] Blair Boyd: Correct. Correct. And this is one I hear all the time when a credit union gets contacted by a member who’s filed bankruptcy and they’re represented by an [00:22:00] attorney, but they have a question about their account or a reaffirmation agreement, what should they do in that situation?
[00:22:05] Jim Sorenson: Yeah . The debtor as a general rule, if the debtor is calling in the credit union can have a conversation with them.
[00:22:12] But the credit union needs to be careful. You never want those words or the debtor to twist the words that are spoken. So I think how you handle this as a credit union really depends upon the situation. And, it depends on do we have recorded calls where we can prove what was said.
[00:22:30] How comfortable are we with the training of our staff? And them knowing what they can do and can’t do. And then what’s our tolerance for risk? If your tolerance for risk isn’t very high, it’s probably best if they’re represented by a lawyer to say, I’m sorry. All communication needs to go through, you’re a lawyer and end it there, and reach out to the lawyer.
[00:22:47] Those are things that we, when I’m asked those questions and how to approach that, it really, I like to give the client kind of the whole picture and let them decide what their level of risk and tolerances [00:23:00] for that situation but clearly the safest is to limit it or not to it.
[00:23:04] Blair Boyd: Sure. At what point does a credit union need to contact their attorney when they’re aware of a bankruptcy?
[00:23:10] Jim Sorenson: Yeah, that’s a great question. And one of the things that we try to do is educate our clients on when, and what they can do there themselves, because not every bankruptcy case, not every bankruptcy filing.
[00:23:21] Is it necessary that the credit union hire a lawyer or hire us? And Blair, you know this and hopefully educating people about this, but one of the things we do every year is host a seminar for credit unions in July. And that’s an annual thing we do. And at those seminars we include hands-on training for credit unions on handling certain things in bankruptcy without a lawyer.
[00:23:46] There are things that the credit union can do. The credit union can file their own proofs of claim in bankruptcy court if they’ve been trained properly. Now again, you need to know what you’re doing. You don’t want to file a proof of claim and not know what you’re doing because you can lose money, you can [00:24:00] miss out on rights.
[00:24:00] You can cost the credit union a significant amount of money, but if you’ve been trained, you have a good process in place and you know what you’re doing, you can do it yourself. Same with reaffirmation agreements. You don’t need a lawyer to prepare and send out and get back reaffirmation agreements. But again, you gotta know what you’re doing, you gotta be able to do it right.
[00:24:19] But when it comes to needing to lift the stay, when it comes to objecting to a plan, when it comes to a debtor trying to redeem collateral, at a low value. Those are times where you need your lawyer involved. And what you don’t want to do in bankruptcy is wait on getting your lawyer involved.
[00:24:40] There are some real strict timetables in bankruptcy court. These timetables don’t have a lot of forgiveness to them. In state court, we have a lot of timetables, but a lot of times there’s exceptions and ways to extend timetables and ways to file things late and get ’em accepted.
[00:24:56] In bankruptcy court that is rare in in some cases [00:25:00] impossible. So those timetables are hard and fast. So if a credit union thinks it needs its lawyer, it needs to reach out to its lawyer right away.
[00:25:08] Blair Boyd: Jim, I think that was a good overview. Obviously bankruptcy is very detailed. A lot of intricacies that go into it, but I think that was a great discussion about a little bit of the ins and outs of bankruptcies.
[00:25:19] So I think we’ll stop there. I ask all the listeners to go thanks for listening. Please go and subscribe to the podcast and like it. Remember, you can find all the episodes on our website that’s www.SVLLaw.com/podcast. Again, go to our website. There’s that, as well as a host of other information regarding us, and I will talk to y’all soon.
[00:25:45] Narrator: Thanks for joining us this week on Banking on Credit Unions. Make sure to visit our website www. svllaw. com forward slash podcast where you can subscribe to the show in iTunes, Spotify [00:26:00] or via RSS so you’ll never miss a show. While you’re at it, if you found value in this show, we’d appreciate a rating on iTunes.
[00:26:09] Or if you’d simply tell a friend about the show, that would help us out too. When it comes to credit union law, the Sorensen Van Leeuwen Law Firm has you covered. Reach out to us at svllaw. com because every credit union deserves top legal representation. Be sure to tune in next week for our next episode.
