THE “CROSS-COLLATERAL” PROVISION The

Lender’s Dragnet Clause

The term “cross-collateral” refers to a provision in a security agreement that you sign when a credit union or bank lends you money to buy a car. The cross-collateral provision, as you will read below, is very powerful. But, there are ways to avoid the powerful effects of the cross-collateral provision. These are some of the things I cover in an Initial Consultation if I see more than one loan at the same credit union or bank. If you would like a free evaluation of your situation and a review of all the alternatives that you have for handling your debt, then contact my office at 210-930-7000 to schedule your appointment.

Here’s What It Is and How It Affects You:

If you buy a vehicle from a credit union or bank, you will sign a security agreement that allows the credit union or bank to hold the title to the vehicle until you pay it off. If you default on your loan, then the security agreement allows the credit union or bank to repossess your vehicle. That part is pretty well understood by everyone that has a vehicle loan. Most often, however, they are not aware that the same security agreement has a provision that reads something like this: “This security agreement that you are providing this financial institution is to secure this loan and any other amounts you now owe or will owe this financial institution.” Let’s suppose that you have a vehicle financed at a credit union or bank, and then you go back to the credit union or bank to get a credit card, or a line of credit, or a signature loan. They are usually very willing to do that because they are holding the title to your vehicle. Let’s suppose you pay off that vehicle, and you still have a balance on loan or account at the credit union or bank. What you will find out is that, most often, the credit union or bank will not release the title to your vehicle until after you have paid off all other loans to the credit union or bank.

The Dilemma In A Chapter 7:

If you file a Chapter 7 and you have a vehicle loan and other loans at the same credit union or bank, you find that you have to pay all loans that you have at that credit union or bank if you ever want to get the title to your vehicle. For instance, let’s suppose you owe $10,000 to the credit union on your vehicle, and that you also owe the credit union another $4,000 on a credit card and another $3,000 on a signature loan. You won’t get the title to your vehicle from the credit union until you pay off the $17,000 that you owe the credit union. (This situation gets even more interesting if you also co-signed a loan for someone at the credit union!) Let’s suppose that the vehicle is worth $10,000. If that’s the case, then you will be paying $7,000 more for the vehicle than it is worth if you want to keep that vehicle. This is one of the hidden costs of a Chapter 7 bankruptcy.

A Solution In A Chapter 7:

There is a solution to this problem in Chapter 7 cases, but this requires cash. In the example above, the vehicle was worth $10,000. In that scenario, you could file a “Motion To Redeem,” which would allow you to purchase the vehicle for the value of the vehicle, which is worth $10,000. This would require that you pay the credit union $10,000 right away for the vehicle. The difficulty here is that most people in a bankruptcy case are not going to have enough cash to pay off their vehicle in a single payment.

Another Solution: File a Chapter 13 and “Cram Down”:

Let’s stay with the same example: you owe $10,000 for a vehicle, but you also owe the credit union another $7,000 in other loans. In a Chapter 13 case, you can solve the “cross-collateral” problem by using the “cram-down” provision in the Bankruptcy Code. This allows you to provide full payment only to the extent the vehicle has value. In our example, the vehicle is worth only $10,000, so we only have to provide full payment for the $10,000. The remaining $7,000 is just treated like an unsecured debt and is dischargeable in bankruptcy. This is how a Chapter 13 can save you money over a Chapter 7.

Good News: This Does Not Apply To Real Estate:

“Cross-collateral” provisions are not included in real estate loans. This means that if you borrowed money at a credit union, and your home is collateral for the loan, then the credit union WILL NOT have the right to take your house if you default on any other loans at the credit union. Your house WILL NOT be collateral for those other loans at the credit union.

Want Info On The Total Costs Of A Chapter 7 Bankruptcy? (Click here)

Want To Know When A Chapter 13 Is Better Than A Chapter 7? (Click here)

Want To Know This Risks Of Co-Signing A Debt? (Click here)

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