Obviously, credit unions exist on the premise that loans that go out to their members will be paid back. When that contract between lender and borrower is broken, most credit unions have a protocol on how to handle the default.

Here are some questions to consider when determining whether your current plan is the best one possible for the health of your credit union:

How much debt is recovered utilizing the current plan?
Is the rate of recovery satisfactory?
What is the incentive for borrowers to make good on their debt?
Does the current process have legal backing?
What steps are in place when attempts to collect on a debt fail?

Whether a credit union handles its own collection process or uses an outside agency, there are times when legal help is required. Some red flags that indicate it may be time to enlist legal help include:

The debtor is ignoring telephone and mail correspondence;
The credit bureau report on the debtor reflects late payments and/or default(s) with other creditors;
Another creditor has filed a lawsuit against the debtor;
The debtor has acted deceitfully;
The debtor contests the validity of the debt; or
The debtor has retained counsel.

Any or all of the above situations can benefit from the debtor having to answer to an attorney representing the credit union. As our law firm has dealt with hundreds of these situations, I will walk through the steps we take to ensure that the money owed to the credit union is recovered.

The first step a law firm should take when working on collections with a credit union is to launch pre-litigation investigation entailing searches on the debtor to uncover everything from addresses and other contact information, social media, employment records, credit reports, and property and other information that may aid in the collection process.

The preparation and mailing of a demand letter is the second step. Demand letters from a law firm are very effective in prompting a response from the debtor. Upon that response, the law firm should then attempt to negotiate a settlement and put it in writing, even if the agreement is for the debtor to make the account current immediately.

In the event that an agreement is reached for the debtor to repay the debt over time, that settlement agreement would be secured by a “confession of judgment,” which is similar to a “consent” judgment but signed by the debtor prior to litigation. This confession of judgment is filed with the court if the debtor defaults on this agreement.

When this happens, we then enforce the judgment we filed in court. That enforcement includes damages, interest and attorneys' fees and costs. We then handle collecting on the post judgment. Those collection activities may include: A creditor's examination, state income tax garnishment, periodic or non-periodic garnishment, judgment lien, order to seize property and receivership.

In some cases, collections require seizure of property either through repossession or foreclosure. There is a legal process for this that requires requests to be filed and orders to be issued from court. Court officers then seize the property and eventually liquidate it.

An extreme remedy for commercial property is receivership. This is when the court appoints a receiver to take control of the debtor's estate, and is reserved for cases when garnishment and seizure of property is unsuccessful or if the lender sees a benefit in keeping a commercial enterprise operable.

The benefit of receivership is that it erases any other liens or debts on or involving the property, and removes legal liability from the credit union. The receiver is responsible for handling the liquidation process of the property.

Collections and other remedies for recovering debt are unpleasant but necessary tools that credit unions must use effectively for their overall financial fitness. When the process isn't working, credit unions would be wise to consider using a law firm that has experience in navigating these procedures successfully and can complete the process efficiently and thoroughly until the debt is returned.

Frank Simon, Esq. is founder and managing partner of Simon PLC. He can be reached at 248-720-0290 or fsimon@simonattys.com.

Instant Insights /

Loan Defaults: When to Utilize a Law Firm

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