The Kentucky Bankruptcy Blog has posted an article that discusses why borrowers should sometime be cautious when taking out loans with credit unions. The author of the blog, Ms. Julie O’Bryan, has an extensive bankruptcy law practice in Louisville and also has an excellent book available for Kentucky residents who are considering bankruptcy.
In the article, Ms. O’Bryan opens by reminding borrowers that credit unions and some banks use “Loanliner” documents, which were developed by CUNA Mutual Group and are standard loan documents that are sold to financial institutions. About 70% of credit unions use Loanliner documents, which require a lending provision in which the borrower agrees that all other loans with the lender would be cross-collaterized.
Cross-collaterization is when the credit union uses the collateral from one loan for other loans, too.
The cross-collateralization clause from a recent Loanliner agreement reads: “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 are fond of using this clause in vehicle loan agreements to secure all other credit union debts with the vehicle. This often causes surprises (and anger) 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 some options you have if you are confronted with cross-collaterization on an auto loan. You could file Chapter 13 bankruptcy and knock the amount you owe on the loan to match the actual value on your vehicle. In a Chapter 13 case you can “cram-down” over 3 to 5 years and any remaining debt is discharged at the end of the case.
You could also file for Chapter 7 bankruptcy. In a Chapter 7 case, the attorney would ask the credit union to re-draft an affirmation agreement for your vehicle without including other debts. You’re basically asking the credit union to remove the cross-collaterized loans. If they refuse you can surrender your vehicle to them to remove the debt on it or you can redeem the vehicle. Redeeming the vehicle is only an option in Chapter 7 and allows the debtor to keep the vehicle and only make a lump sum payment based on the vehicle’s actual value. Monthly payments are not an option.
Ms. O’Bryan suggests if you have a loan through a credit union you should review the paperwork carefully with a qualified bankruptcy attorney to see if there is a cross-collaterization stipulation.
Before you decide to file for bankruptcy, it’s imperative that you consult with an attorney. If you have further questions or concerns about bankruptcy, feel free to contact us through our website or by calling 205-879-2447. You may also obtain a copy of our free book on stopping wrongful foreclosures and the problems of hidden fees by emailing us.
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