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Credit Unions - That Nasty "Cross-Collateral" Clause!
What Is Cross Collateral?
"Cross collateral" refers to a nasty provision contained in most credit union loan agreements. Some people call it a “Dragnet” clause. Regardless of what you call it, it works like this: 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 that the same loan agreement will usually 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 credit union has 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 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 pay 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 credit union does not have to give you back your title if you have any other outstanding loans and accounts with them, at least not until you pay those loans and accounts in full. Credit unions can be pretty harsh in dealing with people who have caused the credit union to take any kind of loss, whether by filing bankruptcy or otherwise.
Unless you get a determination to the contrary from a lawyer, you should assume that there is a cross collateral clause in your agreements and that you should continue to pay all loans and accounts you have with the credit union. This assumes that eventually, you will want to get your title back.
One Solution: 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 your cross collateral problems. A motion to redeem is a paper that gets filed with the bankruptcy court asking permission to pay a creditor 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 your loans and the interest rate.
Another Solution: 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 owe $6,000 on a credit card with the same credit union. The cram down provision only requires you to pay $5,000, the value of the car. The rest of the credit union debt is rendered unsecured and therefore dischargeable. On the other hand, if you owe $10,000 on a car worth $12,000, and also owe money on a credit card with the same credit union in Chapter 13, you would have to pay 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.