I always keep a vigilant watch to see if credit unions are creditors in a client’s case. This article details why credit unions are a concern.
The contract you sign at a credit union for a loan, credit card, or line of credit contains in the fine print a “cross-collateral” clause, or a clause whereby you pledge as security any assets you have with (or at) the credit union. This means the credit union has a right to offset a liability owed to the credit union with any asset you have at the credit union, should they choose. For example, if you owe the credit union $5,000 in a line of credit, and you have $4,000 in a savings account at the credit union, the credit union has a security interest in the $4,000, and given the right circumstances, the credit union can take the $4,000 to offset the debt owed to them. This becomes very apparent in the context of bankruptcy. If you file bankruptcy and you owe a credit union $5,000 and you have $4,000 in a checking or savings account at that same credit union, the credit union can take the $4,000 to offset the debt, per their right, and there is nothing we can do.
Therefore, if a client comes into my office and I learn they bank at the same credit union they owe money to, I will have my client open a new account at a new bank to do his or her banking at. When the time comes to file bankruptcy, then, there will be no money in the credit union, and the credit union cannot seize any funds in savings or checking due to the bankruptcy filing.
Some banks are starting to do the same thing. Therefore, I always advise clients to bank somewhere they do not owe money to if they are contemplating bankruptcy.