Questions about cross collateralization and possible refinance before filing

[PurplePanda]

I am in the planning stages of filing CH7 in November, 2021. I have spoken to an attorney and we have a general plan in place. I was doing a bit a research on cross collateralization and now realize that I may have an issue. It wasn’t discussed with my attorney because, at the time, I didn’t know I needed to.

I am a member of a credit union were I have (had) my primary checking account. I also have a credit card with the CU with a balance of $10K, as well as a secured boat loan on which I owe around $19K (the value of the boat is about even with what is owed). When I talked with my attorney, I told him about the boat, that there was a secured loan, and that I want to keep the boat and continue paying the loan. I didn’t specifically mention the credit card that I will stop paying next month because at the time, I didn’t understand the significance of having a credit card and boat loan with the CU. Keeping the boat is huge for us, so surrendering it to the CU would be absolute last resort.

If I understand cross collateralization correctly, the credit card debt is secured by the boat, because the boat was used as collateral for the boat loan. I may still be able discharge the credit card debt, but a lien for the amount discharged will remain on the boat. Or, it could mean that I may have to reaffirm both debts? I also read that some CUs will allow me to affirm one but not the other? But, if what I am reading is correct and the CU allows me to reaffirm the boat and not the credit card, I would have to obtain a redemption loan for the boat or pay for the balance in cash? Please help me understand this process and anything I am missing.

Here is a little more information and my question: My SO pays for the boat payment every month. The boat title and loan is currently in my name only. Would it be possible/advisable for us to jointly refinance the boat together with another lender right now before I default on the credit card so there are no cross collateralization issues? Or, would that be a huge issue with my upcoming CH7 filing in November? I wouldn't be able to refinance on my own because my debt to income ratio has killed my credit score.

I can call my attorney and ask the questions but before I make the call, I thought I would check in here first. Thanks so much!

Oh, and by the way, I have already opened a new checking account with a new bank that is unrelated to any debt or other accounts I have. Just in case anyone was wondering. ;)

[justbroke]

Well, what I'm about to write is just my opinion.

You are correct on how cross-collateralization works with credit unions (CUs). Depending on the CU, the member themselves, and likely, how much loss they are willing to accept, a CU may or may not allow the cross-collateralization to be broken. In some cases a CU may allow the member-debtor to reaffirm only the secured property (car/boat/house) and will remove the cross-collaterization to allow the other deb to be discharged as unsecured. Otherwise the CU would require you to reaffirm both debts and that is not a good thing.

I don't know if your attorney would sign-off on a reaffirmation but they may (since you already mentioned it). Reaffirmation of credit union debt is automatic if your attorney signs the agreement and files it, even if the attorney marks that "presumption of undue hardship" box! The question is whether your attorney realizes that the boat is through a CU because that brings in the cross-collateralization with the other unsecured debt. Unless you can negotiate with the CU on reaffirmation it may be difficult. The thing that's going to tie you up is that cross-collateralization

You may try to get a redemption loan (a/k/a a 722 Redemption Loan) and buy the property back at current market value. I have used a 722 Redemption with apparent ease, but now realize that they are not as easy to obtain as I believed. I believe that companies like US Bank (who own 722 Redemption Loans), looks to prior payment history for vehicles. I assume they actually use the FICO Auto Score to check the debtor's history before approving a redemption loan. With the redemption, you don't have to negotiation as you would with a reaffirmation. You just need to find the money to payoff the debt.

Yes, you could refinance the boat and move it to another lender. This actually does two things. It destroys the purchase-money aspect of the loan and would move it to a new lender. This may be your best option if your credit is still very strong. I don't know your APR but maybe you could even obtain a better APR, although credit unions are usually the best as far as APR.

Just my thoughts.

[PurplePanda]

Yes, you could refinance the boat and move it to another lender. This actually does two things. It destroys the purchase-money aspect of the loan and would move it to a new lender. This may be your best option if your credit is still very strong. I don't know your APR but maybe you could even obtain a better APR, although credit unions are usually the best as far as APR.

I am thinking this is the best route. However, my credit is shot because of my debt to income ratio. I have not yet missed any payments but there is no way I could get refinancing by myself. However, I wouldn’t have a problem if my significant other co-signed or we took out a joint loan. I just want to make sure that doesn’t potentially raise any flags with the Trustee when I file. Because, that would also cause a title change from my name to both our names. Also, what would happen if he co-signed or we took out a joint loan? Would he need to be included on my petition?

[justbroke]

I didn't consider the impact of a joint loan. This is probably a more detailed question that needs to be answered by your attorney. I'm thinking that you need to be careful with the title so that it doesn't look like you "sold" it for less than the value, or transferred property to hinder or delay creditors or the trustee.

Do you really need the boat? That's probably the question I should have asked up front. I know that you wrote that it's huge for you, but is it necessary? Ask your attorney, but maybe you could sell it to your SO for the current value of the loan (or the value of the boat, whichever is more?) and your SO obtains a loan in their own name.

If that payment is over $500/month that's something that I wouldn't want to not discharge in bankruptcy. I love boating and could never imagine giving up a boat. But if the boat is practically your SO's -- as they make all the payments anyhow -- why not talk to your attorney about transferring it in the proper manner?

I did not have the need to deal with a luxury item (a boat) during my bankruptcy although I had 3 vehicles. I can't help you in any manner except to say that you should not do anything with the boat title until you speak with your attorney.

[PurplePanda]

Okay, so now I need to provide some backstory on the boat, which also explains why I am waiting until November to file. My attorney knows about the boat and we talked about it at length. The only thing we didn’t talk about was the cross collateralization issue because I wasn't aware of the potential issues at that time. He knows the loan is through a CU but I didn’t mention that I also had a credit card with the same CU. Anyway, my attorney is on board with me keeping the boat for two reasons: 1) because I want to keep it and there will not be an issue with equity, exemptions, etc., and 2) because it could potentially be helpful because of another issue.

I purchased/financed the boat in September, 2019. In November, 2019, I took an early withdrawal from my 401k to pay my boyfriend’s divorce property settlement to his exwife so that he and his kids didn’t lose their home. Thus the reason I am waiting until November, 2020 to file so we can get past the two year disclosure period. Otherwise, the trustee will go after her for that money and then she will go after my boyfriend for it. In the event that the trustee asks questions and we have to disclose that I paid the exwife and wants to go after that money, my attorney said that we can try to use the boat to our advantage. So, we would explain to the trustee that he agreed to make my boat payment ($350/m) to pay me back for the money I paid his exwife.

I will make a follow-up call to my attorney to get his advice as to how this would be best handled. Thanks for all of your help!

[justbroke]

Yeah, I see the transfer of property to an insider issue. No need to rock the boat any more than it is already rocking (pun intended). It will be interesting if it does come up.

[PurplePanda]

I spoke with my attorney this morning and told him about the boat loan and credit card being with the same CU and he said, “well, that’s not good.” So, we discussed the best way for me to plan now and get ahead of it, which is by me refinancing the boat as soon as I possibly can and before I default on anything.

[justbroke]

You may be able to shop for a refinance of the boat loan through a different credit union. I think I was looking at Sea Dream that does boat loans, but they may want equity in the boat.

I'm glad that your attorney now realizes the issue.

[PurplePanda]

You may be able to shop for a refinance of the boat loan through a different credit union. I think I was looking at Sea Dream that does boat loans, but they may want equity in the boat.

I'm glad that your attorney now realizes the issue.

I applied with a company called LightStream and am waiting for their decision. If I am not approved, I will look into SeaDream and possibly other CUs. I don’t have a lot of time, though, because my first late CC payment will be in a couple weeks. I actually paid on one today that I previously hadn’t planned on paying because I didn’t want to start that clock ticking yet.

Yeah, I am so glad that I did a little research earlier this week to understand the full scope and impact of cross collateralization. I understood the concept but I thought it only affected funds on deposit, not collateral of loans. And, I am thankful for your advice and confirmation of what I suspected and subsequently learned. I pulled my CU member agreement and loan agreement this morning before I called my attorney and it was very clear.

[justbroke]

LightStream is SunTrust (Truist) and they can be tough. They do, however, offer unsecured loans which could create another problem for you! If LightStream does offer you an unsecured loan, be very very careful. You would have instant equity in the boat because the boat wouldn't be secured by any loan.

[PurplePanda]

LightStream is SunTrust (Truist) and they can be tough. They do, however, offer unsecured loans which could create another problem for you! If LightStream does offer you an unsecured loan, be very very careful. You would have instant equity in the boat because the boat wouldn't be secured by any loan.

I was denied by LightStream, even with a cosigner. And yes, an unsecured loan would be very bad.

[justbroke]

I would shop at a different credit union, small community bank, or try SeaDream. Also note that you're shopping and your score may get dinged for inquiries, but if they are using the FICO Auto Score -- which many boat lenders do -- then all inquiries for a "vehicle" loan will be grouped together as one inquiry.

I wish you great success.

[PurplePanda]

I would shop at a different credit union, small community bank, or try SeaDream. Also note that you're shopping and your score may get dinged for inquiries, but if they are using the FICO Auto Score -- which many boat lenders do -- then all inquiries for a "vehicle" loan will be grouped together as one inquiry.

I wish you great success.

In looking at my denial letter, the reason for the denial was debt to income ratio and I expected that. I was hoping that using my boyfriend as a cosigner would help with that but I learned that he has some past delinquencies that I wasn't aware of.

I am not hopeful that I will be able to refinance. I have too much debt and I lost 30% of my income last year. If I understand correctly and I am not able to refinance, my options would be 1) surrendering/discharging the boat and discharging the CC debt; 2) keeping the boat, discharging the CC debt and having a lien placed on the boat for the discharged CC debt; or 3) keeping the boat and reaffirming both loans. Is that accurate?

[justbroke]

Option 4 is that the CU makes a deal with you and segregates the credit card from the boat (removes the collaterization). Some CUs will do that in some situations. I don't know how they determine what's in the CU's, and the membership's, best interest. I mean, technically they would "eat steal" if you were to surrender the boat. "Eat steel" comes from bankruptcy jargon whereas an vehicle lender isn't flexible with reaffirmation, so you make them "eat" the car/vehicle. They would "eat steel" because they would lose money trying to send the boat to auction; they would not get market value. Your attorney may or may not be able to convince the CU to allow you to keep the boat without any CC debt.

(FYI, the CC debt is not actually discharged in your #2 since it is secured debt -- collateralized debt.)

I never recommend reaffirming debt except if it's a credit union, it's a vehicle, and it's necessary for health, safety or to earn income in primary profession.

[PurplePanda]

Option 4 is that the CU makes a deal with you and segregates the credit card from the boat (removes the collaterization). Some CUs will do that in some situations. I don't know how they determine what's in the CU's, and the membership's, best interest. I mean, technically they would "eat steal" if you were to surrender the boat. "Eat steel" comes from bankruptcy jargon whereas an vehicle lender isn't flexible with reaffirmation, so you make them "eat" the car/vehicle. They would "eat steel" because they would lose money trying to send the boat to auction; they would not get market value. Your attorney may or may not be able to convince the CU to allow you to keep the boat without any CC debt.

(FYI, the CC debt is not actually discharged in your #2 since it is secured debt -- collateralized debt.)

I never recommend reaffirming debt except if it's a credit union, it's a vehicle, and it's necessary for health, safety or to earn income in primary profession.

Again, thanks for all of your helpful advice and information.

While I certainly want to keep the boat, I also NEED to keep the boat. The boat is going to offer some protection in the event that the trustee asks questions and discovers the large "insider" payment in November, 2019. Here's the reality: the trustee is going to look at my 2019 tax return and see that I took a significant withdrawal from my 401K. Seems to me that he/she might ask some questions about that money. If so, that payment will be disclosed and we will need that boat to help prevent the trustee from going after the ex and then ultimately my boyfriend.

I contacted SunDream and they typically do not refinance unless the borrower has superior credit and is refinancing over $75K. So, strike two. We may try a small local bank and see where we can get.

I have one more question about your comment pertaining to option #2. Seeing the credit card debt is actually secured/collateralized debt, it seems to me that I should continue making my monthly boat and credit card payments indefinitely, as those payments are both for secured debt and would not be considered preferential payments. Is that correct? Or, do I stop paying 90 days before I file? Then, I cross my fingers and hope that the CU makes a deal to segregate the debt.