Credit Unions and Cross-Collateralization With Vehicle Debt

Posted by Wesley Scott on April 29, 2020 at 1:29 PM
Wesley Scott

Are you a member of a credit union? Do you have an auto loan on a vehicle with that credit union? Did you know that if you have any other debt with that credit union, it is most likely also secured by your vehicle? Read more to find out why.

What is Cross-Collateralization?

Credit Unions, unlike most other banks or lenders, insert a clause in their loan documents called a “Cross-collateralization clause” and it reads something like this: “The collateral securing this loan shall also secure any and all other loans and accounts with the credit union.” This language means that the credit union has a lien on the same car or truck to secure all of the other debt you might have with it—loans, credit cards, other auto loans, etc. The really unfortunate thing about these clauses is that the credit unions are usually using decent interest rates and repayment terms as selling points, but not advertising these extremely important, and often detrimental clauses. It is usually not until you default on one of the payments, or go to sell a vehicle that you discover that the credit union may not have to release its lien, but by that time, it is usually too late to do anything about it.

Cross-Collateralization and Chapter 7 Bankruptcy

The biggest problem that we see daily is when someone in financial distress files a Chapter 7 bankruptcy and has an auto loan and other types of debt with a credit union. Normally, when you file a Chapter 7 bankruptcy and have credit cards and personal loans, they are discharged and you are able to get a fresh start. However, when you have credit cards and personal loans with a credit union that are secured by your car, you are faced with a difficult decision—do you continue to pay the credit cards and/or personal loans that are secured by your automobile, and thereby forgoing your fresh start, or do you let everything go, including your automobile. This is the very real problem that credit unions cause for many debtors with their cross-collateralization clauses. Once you default on the payments, the credit union will not release its lien until the other debt is paid, so after filing a Chapter 7, it’s either an all or nothing proposition regarding cross-collateralized loans.

How We Can Help

Thankfully, all hope is not lost! If you find yourself in this situation and are in a position where you must keep the vehicle, we may be able to help. Within a Chapter 13 bankruptcy filing, there are provisions in the bankruptcy code that allow us to basically undo the cross-collateralization clause and allow you to walk out of the plan after 3-5 years with the title to the vehicle without paying all of the cross-collateralized debt. If you have questions about how we can help, please contact us to set up a free consultation today!

When the time is right, or when you are ready, reach out to Minnesota’s LARGEST bankruptcy law firm at www.kainscott.com. You will be glad you did!

 

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