What Is Cross Collateral?
If you borrow money from a credit union to buy a car or truck, the loan agreement you sign will list the car or truck as collateral for the loan. This much makes sense. The nasty part is the same loan agreement will usually also include a provision that reads like this: “The collateral securing this loan shall also secure any and all other loans and accounts with the credit union.” This means that the union is also putting a lien on the same car or truck, to secure all of your other loans and accounts with the credit union. The really nasty thing is that the credit union almost never tells your or its other members about this provision until it is too late. What happens is that, later on, when you finish paying off the loan obtained to buy the car or truck, or wish to sell the car or truck….because of the “cross collateral” language in your contract….the union does not have to give you back your title if you have any other outstanding loans and accounts with the credit union….at least not until such time as you pay, in full, all those loans and accounts. Credit unions can be pretty harsh in dealing with people who have caused them to take any kind of loss, whether by filing bankruptcy or otherwise.
Unless and until you get a determination to the contrary from a lawyer, if you intend to keep a car or truck, where the credit union holds your title, you should assume that there is a “cross-collateral” clause in your agreements and that you need to keep paying on all loans and accounts you have with the same union. This assumes….of course…. that, eventually, you will care about and want to get you title back.
Chapter 7 and the Motion to Redeem:
Under some circumstances, in a Chapter 7 bankruptcy case, it will make sense for you to file what is known as a Motion to Redeem to relieve you of some or all of my cross-collateral problems . A Motion to Redeem is a paper that gets filed with the Bankruptcy Court asking permission to pay to a creditor the value (the liquidation value) of a car or truck, in full satisfaction of all loans owed to that creditor which are secured by the car or truck. Filing such a motion only makes sense if the liquidation value of my vehicle is considerably less than the total of all loans secured by my vehicle. However, a Motion to Redeem may or may not be advisable, depending upon the amount of my loans and the interest rate.
Chapter 13 and Cram Down:
In Chapter 13, we can sometimes take care of the “cross collateral” problem using the “cram down” provisions of the Bankruptcy Code. For instance, let’s say you owe $10,000 on a $5,000 car, but you also have a credit card with the same credit union on which you owe $6,000. The “cram down” provision only requires you to pay the $5,000 value of the car. The rest of the credit union debt is rendered unsecured and therefore dischargable. On the other hand, if you owe $10,000 on a car worth $12,000, and also owe have a credit card with the same credit union….in Chapter 13….you would have to pay out the full $12,000, since the car secured both the car loan and the credit card debt.
Good News: Cross-Collateral Does Not Apply To Real Estate:
“Cross collateral” provisions generally do NOT apply with respect to real estate. Therefore, if you have borrowed money from the credit union, and have given your house as collateral, most likely the credit union will not have the right to claim your house, by reason of “cross collateral” provisions, as collateral for any of your other loans or accounts with the credit union.