Cross Collateralization And Bankruptcy

Bankruptcy And Cross Collateralization

collateralized loansSince people have different financial situations, the circumstances around their bankruptcies are also different. Just because person A filed for a Chapter 7 bankruptcy and got back on their feet does not mean that the same will happen to person B if they file.

One reason why bankruptcy may work differently for different people is the collateral their debt was tied to. You need to work with an experienced bankruptcy attorney to help you navigate your bankruptcy case if it is complicated by cross-collateralization.

Understanding Cross-Collateralization

Collateral is something you pledge as security for repayment of a loan. Your lender can claim an asset such as a house, car, boat that you set as collateral for a loan if you fail to pay your debt. Cross-collateralization is used to refer to a situation where the collateral for one loan is also used as collateral for another loan.

Credit unions often use cross-collateralization for large items such as boats and cars. For example, if you have a boat loan from a credit union and you apply for a personal loan from the same credit union, the credit union can use your boat as collateral if you default on that personal loan.

This can complicate matters if you are in a lot of debt and are thinking of filing for bankruptcy to save a property or asset. You need to read the fine print before signing loan agreements because they may contain a cross-collateralization clause.

Filing For Bankruptcy And Cross-Collateralization Loans

If you are experiencing difficult financial situation and are unable to pay back your debts, bankruptcy is one option you may turn to protect your property from being taken away. Cross-collateralized loans can complicate matters when filing for bankruptcy because you have one asset used as collateral for more than one loan. So if your vehicle is the collateral for two loans, you have to repay those two loans if you want to keep your vehicle.

That means that cross-collateralized loans are in fact “secured” loans. People who file for bankruptcy for secured loans, have to repay the loan or risk losing the property they used as collateral. But unsecured loans such as credit cards and other personal loans are usually discharged or wiped out in bankruptcy.

Bankruptcy Options For People Involving Cross Collateralized Loans

The following are the options you have if you are filing for a Chapter 7 bankruptcy:

  • Let the credit union seize the collateral whether it is you car or home so that your debt can be discharged
  • Negotiate with the credit union for a loan reaffirmation agreement that reduces your monthly payments
  • Pay back what you owe
  • File a motion to redeem with a bankruptcy court to allow you pay the creditor a lump sum payment equal to the vehicles current market value

You have the following options if you are filing a Chapter 13 bankruptcy:

  • You can surrender the collateral to the lender
  • Add a clause in your Chapter 13 bankruptcy plan that details how you will pay for the collateral

Do not worry if this seems too complex because a knowledgeable bankruptcy attorney can explain in detail which of the two options will be more appropriate for you.

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