Credit Union held in Contempt of Court for failure to stop automatic payroll deductions upon debtor filing for bankruptcy.

The debtor was on automatic payroll deduction to MFA Employees Credit Union for an unsecured loan. Debtor filed a Chapter 7 Bankruptcy but debtor did not cancel the payroll deductions for the credit union loan payments.

The credit union continued to receive and apply the payments to the debtor’s loan. Several months later, debtor demanded the payments be returned and the credit union, through their attorney, refused to refund the payments. The credit union attorney argued that the payroll deductions should continue until the debtor cancelled the payments.

The Court found that the credit union’s act of continuing to accept the payroll deductions and applying them to the loan constituted a violation of the automatic stay imposed by the Bankruptcy Court.

The technical violation could have been remedied by the credit union returning the funds, however, the credit union’s refusal to refund the money triggered the Court to also assess costs against the credit union.

The Court suggested that a prudent creditor who receives a notice of bankruptcy from a debtor with a payroll deduction being used to pay an unsecured debt, should probably consider a form letter to debtor’s attorney advising that debtor may terminate the payroll deduction.

Alternatively, if payments are requested to be returned to the debtor, the creditor should refund the payments immediately. In re Keith Brooks, 132 B.R. 29.

Author: Charles R. Harroun, Attorney at Law