A majority of credit unions and some banks use what are called Loanliner documents for their lending transactions. These agreements are standard loan documents developed for and sold to financial institutions. Included in the standard Loanliner lending agreements is a provision in which the borrower agrees that all other loans with the lender are cross-collateralized.
Cross-collateralization is the use of collateral from one loan to secure other loans. The cross-collateralization clause from such an agreement might read,
the security interest also secures any other loans, including any credit card loan, you have now or receive in the future from us and any other amounts you owe us for any reason now or in the future.
Credit unions will often use this type of clause in vehicle loan agreements to secure all other credit union debts with the vehicle. This often rears its ugly head when an unsuspecting credit union member tries to trade-in his car and discovers that the debt on the vehicle includes a personal loan, a line of credit, and credit card balances.
There are options if you are faced with a cross-collateralized auto loan.
For example, you can file a Chapter 13 bankruptcy and cram-down the loan to match your vehicle’s value. Any remaining debt is discharged at the end of the Chapter 13 case. During a Chapter 13 case, you can pay a cram-down value over three to five years.
In a Chapter 7 bankruptcy, you or your attorney have the option of asking the credit union to draft a reaffirmation agreement for the vehicle without regard to other debts. This is just asking the credit union to voluntarily strip off the cross-collateralized loans. If the credit union refuses to do so, there are two options: (1) surrender the vehicle and discharge all debts to the credit union; or (2) redeem the vehicle.
Redemption is a process exclusive to a Chapter 7 bankruptcy case where the debtor keeps a vehicle by paying the value of the vehicle, not the total debt that is owed. While it sounds similar to a Chapter 13 cram-down, redemption differs in that the payment to the secured creditor must be in a lump sum. Payments plans are not allowed.
If you have an auto loan through your local credit union, review the loan paperwork and look for a cross-collateralization clause. The attorneys at Miller and Miller can discuss your options with you and help arrive at the best financial decision for you and your family.