Recently on our legal forum a user asked, “I filed for Chapter 7 bankruptcy last year and had $10,000 worth of unsecured credit card debts discharged. Unfortunately, one of those credit cards was with a credit union. I also had a car financed through the same credit union. I paid off the car loan, but the credit union is refusing to send me the car title. When I talked to them they said something about cross-collateralization. Can you tell me more about what this means?”
Cross-collateralization and securing unsecured loans
The practice of cross-collateralization allows a financial institution, such as a credit union, to collateralize one loan with another loan within the same lending institution. This means that when you borrow money or obtain a credit card with a credit union you may be agreeing to use other assets financed through the credit union as collateral. The practice is common with a variety of different types of loans, including vehicles, boats, equipment, trailers, recreational vehicles, home equity and even business loans.
Unfortunately, many consumers fail to fully understand their loan documents when applying for a loan and may only find out later that they agreed to a cross-collateralized loan with their credit union.
To find out whether or not you have cross-collateralized loan you can talk to your lender or you can review your loan documents for statements or clauses within the loan documents that state something like the following:
“The property that is given as security for this loan, or property given as security for any other loan, will secure all amounts owed to the [bank or credit union], now and in the future.”
Cross-collateralization may have little impact on some borrowers. Other borrowers, however, may find that the benefits or discounts offered by credit unions are not such a great deal, especially if they need to file bankruptcy. In this case borrowers may find that the debts they thought were unsecure and could be discharged are really secured by other assets.
Why do credit unions cross-collateralize loans?
So why do credit unions cross-collateralize their loans? The reason is really quite simple: less risk. For example, they may have members that charge thousands of dollars in credit card debt thinking that the charges are unsecured debts. If the debt is cross-collateralized, however, the debts are actually secured by another asset that can be repossessed and sold if necessary to repay the credit card debts.
What happens in a Chapter 7 bankruptcy?
Now, you asked what will happen now that you have discharged your credit card debts and finally paid off your car. Without more information you will need to talk to your bankruptcy lawyer, but it is possible that even though you may have discharged the credit card debt, that if your car loan contained a cross-collateralization clause and your car secured not only the car loan but also the credit card debt that if you choose to file for Chapter 7 bankruptcy and you want to keep your car, you must agree to repay both the car loan and the credit card in full.