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Cross-Collateralization: When Unsecured Debt Ends Up Costing You Your Car

Picture of a car getting towed.

When seeking the services of a financial institution, many choose credit unions instead of banks because they generally offer certain advantages over banks. You might get a better interest rate on a loan, a higher credit limit, fewer fees, or more personalized attention. But credit unions also commonly practice cross-collateralization – a term most have never heard of or paid attention to when scanning the fine print.

Secured vs. Unsecured Loans

Borrowing money to purchase something of value, like a car, boat, or home requires a measure of security for the lender. The property you buy is used as collateral so if you don’t make your loan payments, the lender can take the item, sell it and pay off the debt. This is referred to as a secured loan. In contrast, an unsecured loan is collateral-free lending supported only by the borrower’s creditworthiness. 

So Then What’s Cross-Collateralization?

Cross-collateralization simply means using the collateral for one loan on another loan.  How can this happen? When you borrow money from a credit union to purchase something, the loan contract might include a clause that says not only is the asset the collateral for the loan you just procured in order to buy it, but it will also be the collateral for any other loans you take out through the credit union – including credit cards and personal loans.

Walk Me Through This

So you take out a loan to buy a car from your credit union. The loan has a cross-collateralization clause in it. You later open a credit card account with the same credit union and max out the credit line. Time passes, you pay off the car, but still have a balance due on the credit card. If at any time you are unable to make payments on the credit card, the credit union can repossess your car and sell it to satisfy the credit card debt.

How Does Cross-Collateralization Affect a Bankruptcy?

You are obligated to repay secured loans if you want to keep the property securing the loans when you file bankruptcy. For example, if you owe money on your car, you must pay back the loan if you want to keep your car when you file. At the same time, depending on which chapter you file, unsecured debts can be wiped out completely – a favorable advantage of bankruptcy. But cross-collateralization is a circumstance where debts you think are unsecured might actually end up secured. And in those cases, discharge of the debt isn’t an option without returning the collateral. Instead you must pay the balance of the unsecured loan in order to keep the collateral.

In a Nutshell

If you have loans or debt with a credit union, it is important to be mindful of the potential for cross-collateralization when you file bankruptcy. Anticipating a discharge of debt on your unsecured loans while keeping all your property may not be an option if your credit union has a cross-collateralization clause in the contract.

For people struggling with debt, there are many options. If you find yourself in an unmanageable situation, the right option for you will depend on several factors. The advice of an experienced bankruptcy attorney is essential in order to determine the best course to take. At the Law Office of Joel R. Spivack, we specifically focus on helping clients get through challenging financial times. If you need guidance and support for your unique situation, reach out to Attorney Joel Spivack today.

I will help you regain control of your financial situation. I offer a free, face-to-face consultation at our Cherry Hill, NJ office. I will provide you with honest answers to your questions and let you know what can be done to make the process go as smoothly as possible for your specific issues. You can reach me by phone at 856-488-1200 or you can also fill out my online contact form here.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.