Guard Against Collections and Bankruptcy Risks: Three Steps
The collections process is fraught with the risk of legal action.
Debt collections and bankruptcy go hand-in-hand—and both carry risks for credit unions.
Borrowers are most likely to bring legal action against a credit union in the area of collections, says David Reed, a partner in the law firm Reed and Jolly PLLC and founder of CU Doctor.
To guard against this, credit unions should:
• Ensure the collections department is doing a “communications inventory” through which they review all communications sent to members.
• Get expressed consent to use members’ cell phone numbers as part of their collections effort if the credit union has auto-dialer capacity.
The information can be collected during the account-opening or loan origination process or later, but it must be provided before use.
• Train staff and make them aware of fair lending standards.
While fair lending affects all aspects of the lending relationship, including collections, it is often not considered in collections.
Reed outlines four types of bankruptcy:
- Chapter 7 bankruptcy involves the sale of property to pay creditors. Nonsecured creditors will not receive payment;
- Chapter 13 bankruptcy is when debt is restricted and the debtor does not want to lose assets, such as a home. Nonsecured creditors receive some payment;
- Chapter 11 bankruptcy is designed for businesses and allows debtors time to restructure their debts; and
- Chapter 12 bankruptcy allows farmers and family fishermen to restructure debt and continue operations.
As a general rule, discharged debt, or debt forgiven during bankruptcy proceedings, cannot be converted into new debt when a member applies for a new loan in the future.
When dealing with bankruptcies, lenders and debtors must understand what loan documents are saying, including definitions, rights, and notice requirements, Reed says.
Credit unions must be aware of possible privacy and bankruptcy violations that can occur when posting member account numbers, Social Security numbers, and other similar numbers on a proof of claim.
They also face a significant risk if they don’t execute their right of set off properly.
Reed addressed the CUNA Lending Compliance School in Las Vegas in June.