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Bankruptcy and Cross-Collateralization: What You Need to Know

Loan CollateralEveryone’s financial situation is different, which makes each and every bankruptcy unique – and potentially complicated. One of the things that might make your bankruptcy more complicated is a loan affected by cross-collateralization.

If you have a loan through a credit union and you’re considering bankruptcy, you’ll want to speak to a bankruptcy attorney about how the loan and any cross-collateralization might affect filing.

What is Cross-Collateralization?

Cross-collateralization is a practice used by some credit unions for loans for larger items, such as cars or boats.

Many lenders ask for collateral and use that collateral when a borrower fails to meet payment obligations. For instance, in a mortgage, the collateral is the home. But there are also loans that are usually not secured with collateral, such as credit cards.

Credit unions sometimes include a clause in their loan agreement that not only uses collateral for the specific loan in question, but also for other loans obtained through that lender. For instance, if you have a vehicle loan through a credit union and you apply for a personal loan or credit card, your car could be used as collateral if you default on the personal or credit card loan. Depending on the terms of the loan, your car could still be collateral even if you pay off the vehicle loan.

Cross-Collateralization and Bankruptcy

If all goes well and you’re able to repay all of the loans you have through a credit union, you won’t need to worry too much about cross-collateralization. But what happens if you experience financial struggles and are forced to file for bankruptcy?

In general, when you file for bankruptcy, you must pay back any secured loan or you risk losing the property used as collateral for that loan. Unsecured loans, such as credit cards and other personal loans, are usually discharged in bankruptcy, which means you don’t need to repay them. If you file for Chapter 13, you usually end up paying back only a portion of your unsecured loans, if that.

However, those with cross-collateralized loans experience a different scenario. Cross-collateralization makes a loan “secured“. This means you’ll need to repay the loan in order to keep the collateral, even if the loan was not directly linked to the collateral.

For instance, let’s say you have two loans through a credit union. One is for your vehicle and the other is a credit card. You choose to file for bankruptcy and you’d like to keep your vehicle. This means you’ll need to pay both the vehicle loan and the credit card loan in order to retain ownership of your vehicle.

For more information on the differences between secured and unsecured debts and how these debts are handled in bankruptcy, check out this information from The Balance.

Working with an Attorney Can Help You Navigate Cross-Collateralization and Bankruptcy

It’s easy to see how cross-collateralization can complicate filing for bankruptcy. Many of the rules that apply to traditionally unsecured debts in bankruptcy are different when a loan becomes secure through cross-collateralization.

If you’d like to know more about bankruptcy and cross-collateralization or you’re filing for bankruptcy and you have concerns about how your property will be affected, we can help. Contact the Law Office of Robert M. Geller at (813) 254-5696 to schedule a consultation.

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