"Cross Collateralization: Hidden Costs of Bankruptcy Revealed" VERY Helpful Article
Here's an article called "Cross Collateralization: Hidden Costs of Bankruptcy Revealed. Do I have to Reaffirm/Pay on what I thought was an Unsecured Credit Card ?"
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This was a huge help to me, since it discusses all aspects such as examples and solutions, and very clear for us "laymen".
I found it here:
The term “cross-collateral” is a provision most credit unions and some banks sneak into a security agreement when they lend you money to buy a car. This means that in case of default (non-payment or late payment) , the lender has the right to seize the collateral and sell it. Sometimes lenders, particularly credit unions, insert cross-collateralization clauses to protect themselves against risk. In a Chapter 7 or Chapter 13 Bankruptcy filed in the Middle District of Florida (inclues the following and surrounding areas: Tampa, Orlando, Jacksonville area, Saint Petersburg, Clearwater) this provision can lead to increased expenses in a bankruptcy if you plan to keep your vehicles. An attorney affiliated with FloridaBankruptcyAttorneys.com will be able to give you a couple different ways to get around these cross-collateralization clauses.
An Example of a Cross-Collateralized Loan:
Whenever you purchase a vehicle and you borrow money from a lending institution (credit union or bank or savvy private businesses or individuals) you will be required to sign a security agreement. Many people signing these agreements understand that if they don’t keep up their end of the bargain by paying their monthly payments, the lendor can can repossess the vehicle. Many times, and especially with the Credit Unions borrowers never realize that in their agreement is a provision similar to the following, “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.” Here’s what this provision means: when you sign this agreement to purchase your vehicle, then later get a credit card with the same institution or a loan from them if you are remain current on you vehicle payments, but fall behind on your credit card or loan payments – they MAY repossess your vehicle. Here’s another example of how a cross collateralization issue presents its ugly head: Let’s suppose you pay off that vehicle and you still have a balance on that loan or credit card with the same credit union or bank. The lending institution will not realease the title to your vehicle until you pay off that loan or credit card.
So what happens if I file a Chapter 7:
If you file a Chapter 7 and you have an issue with cross collateralized loans (a loan on your vehicle and other loans or credit cards 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 want to keep the vehicle. For instance, let’s suppose you owe $5,000 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 personal loan. You won’t get the title to your vehicle from the credit union until you pay off the $12,000 that you owe the credit union. Let’s suppose that the vehicle is worth $4,000. If that’s the case, then you will be paying $8,000 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.
Chapter 7 Solutions:
Redemption is a possible solution in Chapter 7, but you will need cash (many ask friends or family members). In the example above, the vehicle was worth $4,000. In that scenario, you could file a “Motion To Redeem,” which would allow you to purchase the vehicle for the value of the vehicle, or $4,000. This would require that you pay the credit union $4,000 right away for the vehicle. This way you can still get rid of those credit cards, and keep the car. I have seen people do this where their parents will willing to give a loan for the vehicle as opposed to giving it up and purchasing a new one after bankruptcy with super high interest rates. 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 $5,000 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 of the vehicle’s value (which may require an appraisal). In our example, the vehicle is worth only $4,000, so we only have to provide full payment for the $4,000. The remaining $8,000 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.
Real Estate Mortgages:
“Cross-collateral” provisions do not apply to real estate loans. This means that if you borrowed money at a credit union to purchase your home, (or where 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 credit card loans at the credit union.
It is important to note that courts may invalidate these types of cross collaterlization clauses if the borrowers successfully argue they were not aware of the clause, or did not understand it. However, courts will generally uphold these clauses when they consider the security agreement language to be clear, unambiguous and in keeping with the Truth in Lending disclosure requirements. The Truth in Lending Act Regulations provides that the statement: “Collateral securing other loans with us may also secure this loan,” qualifies as a valid disclosure.
An Example of a Cross-Collateralized Loan:
Whenever you purchase a vehicle and you borrow money from a lending institution (credit union or bank or savvy private businesses or individuals) you will be required to sign a security agreement. Many people signing these agreements understand that if they don’t keep up their end of the bargain by paying their monthly payments, the lendor can can repossess the vehicle. Many times, and especially with the Credit Unions borrowers never realize that in their agreement is a provision similar to the following, “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.” Here’s what this provision means: when you sign this agreement to purchase your vehicle, then later get a credit card with the same institution or a loan from them if you are remain current on you vehicle payments, but fall behind on your credit card or loan payments – they MAY repossess your vehicle. Here’s another example of how a cross collateralization issue presents its ugly head: Let’s suppose you pay off that vehicle and you still have a balance on that loan or credit card with the same credit union or bank. The lending institution will not realease the title to your vehicle until you pay off that loan or credit card.
So what happens if I file a Chapter 7:
If you file a Chapter 7 and you have an issue with cross collateralized loans (a loan on your vehicle and other loans or credit cards 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 want to keep the vehicle. For instance, let’s suppose you owe $5,000 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 personal loan. You won’t get the title to your vehicle from the credit union until you pay off the $12,000 that you owe the credit union. Let’s suppose that the vehicle is worth $4,000. If that’s the case, then you will be paying $8,000 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.
Chapter 7 Solutions:
Redemption is a possible solution in Chapter 7, but you will need cash (many ask friends or family members). In the example above, the vehicle was worth $4,000. In that scenario, you could file a “Motion To Redeem,” which would allow you to purchase the vehicle for the value of the vehicle, or $4,000. This would require that you pay the credit union $4,000 right away for the vehicle. This way you can still get rid of those credit cards, and keep the car. I have seen people do this where their parents will willing to give a loan for the vehicle as opposed to giving it up and purchasing a new one after bankruptcy with super high interest rates. 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 $5,000 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 of the vehicle’s value (which may require an appraisal). In our example, the vehicle is worth only $4,000, so we only have to provide full payment for the $4,000. The remaining $8,000 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.
Real Estate Mortgages:
“Cross-collateral” provisions do not apply to real estate loans. This means that if you borrowed money at a credit union to purchase your home, (or where 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 credit card loans at the credit union.
It is important to note that courts may invalidate these types of cross collaterlization clauses if the borrowers successfully argue they were not aware of the clause, or did not understand it. However, courts will generally uphold these clauses when they consider the security agreement language to be clear, unambiguous and in keeping with the Truth in Lending disclosure requirements. The Truth in Lending Act Regulations provides that the statement: “Collateral securing other loans with us may also secure this loan,” qualifies as a valid disclosure.
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