The Financial Services Compensation Scheme has declared the Havant Area Savers Credit Union in default.
The FSCS says it will aim to pay compensation to members of the union, who have been unable to access their savings since December 31, 2010, within seven days “in the vast majority of cases”.
It emerged earlier this week that the FSA had cut the credit union’s permissions at the end of last year.
The FSCS says the credit union has 260 members with accounts totalling £86,000.
FSCS chief executive Mark Neale says: “Those members will be entitled to compensation of up to £85,000 each, and they will not need to complete an application form to make a claim. Once we have the information we need about their account, we’ll be able to pay them compensation automatically.”