A “cross-collateral clause” refers to a provision in a security agreement between a financial institution and a person taking out a loan to buy an asset, such as a car. The clause grants the lender the legal right to seize the asset pledged by the borrower if the borrower defaults on any loan with the lender.
This means that the financial institution can repossess the borrower’s car even if she is current on all of her car payments if she defaults on another loan with the lender, such as missing a credit card payment.
Cross-collateral clauses are contained in most credit union loan agreements. These types of clauses are also known as “Dragnet clauses.” The language of a cross-collateral clause may read: “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.”
Notice the clause states “other amounts you now owe or will owe[.]” After the borrower takes out a car loan with the credit union, she may then get an offer for a credit card. Typically the credit card agreement will not mention the cross-collateral clause nor the car loan. Then when the borrower defaults on her credit card payment, the credit union repossesses her car. The repossession comes as a surprise because all payments on the car loan were current.
Are Cross-Collateral Clauses Enforceable?
In general, cross-collateral clauses are enforceable. However, in bankruptcy, there are options to circumvent the clause. Though, the options available to you will depend on the specifics of your case. Together we will explore your options regarding your car during our free consultation.
Chapter 7 Bankruptcy Motion to Redeem
Under some circumstances in a Chapter 7 bankruptcy, a Motion to Redeem can relieve the debtor of cross-collateral clause issues. A Motion to Redeem asks the Bankruptcy Court permission to pay the creditor (the credit union) the fair market value of the vehicle, regardless of the actual amount owed on the car loan and in full satisfaction of all loans owed to that creditor that are secured by the vehicle.
However, this option may not be the best solution. The redemption amount must be paid in full during the bankruptcy, which may mean financing another car loan from a high-interest lender. Also, redemption may not be advisable depending on the value of the vehicle as compared to the loans securing it.
Chapter 13 “Cram Down”
In a Chapter 13 bankruptcy, it may be possible to use a “cram down” to reduce the amount owed on the vehicle to its fair market value and to resolve any cross-collateral clause issues.
If you financed your vehicle through a credit union and you owe them money on more than just your car loan, it is critical that you understand the terms of your loan document. You do not want to miss your credit card payment, and then be blind-sided with a car repossession.
Bankruptcy is a complex area of federal law. The ins and outs of cross-collateral clauses can be complicated. Here at the Law Offices of Barbara B. Braziel we have filed thousands of successful Chapter 13 and Chapter 7 bankruptcy cases over the past 35 years. We are standing by to answer your questions about cross-collateral clauses and bankruptcy in Georgia. Call us right now (912) 351-9000 to schedule a free consultation.
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