Nasty Surprise in Credit Union Car Loan Documents

05 Sep Nasty Surprise in Credit Union Car Loan Documents

Do you think you could owe twice as much as you thought on your car loan? It could be true, if your car loan is owed to a credit union, you owe a large credit card balance to the credit union, and if the dreaded “cross collateral clause” is lurking in the fine print of the car loan agreement.

A cross collateral clause is a provision which states that the item of security (usually your car) secures any other debts you ever come to owe the credit union. Cross collateral clauses usually appear in the fine print on the second or third page of the car loan agreement, placed where it is unlikely anyone will ever see it. These tiny land mines are planted only by credit unions, never by banks. The credit union will virtually never point out the presence of a cross collateral clause, until much later, after someone steps on this land mine by failing to pay on the other loan obligation.

Here’s how this nefarious little device works: you take out a car loan from the credit union. Buried inside is the unnoticed cross collateral clause. Later, you acquire a credit card from the credit union, and charge a substantial balance on the card, let’s say, $10,000. Sometime later, you file chapter 7 bankruptcy, at a time when your car loan balance is, let’s say, $5,000. You expect that all your credit card debts will be discharged, and the only debt you will have remaining is your $5,000 car loan.

Wrong! This is when the cross collateral clause land mine explodes your expectations: the credit union threatens to repossess your car if don’t pay both the $5,000 car loan and the $10,000 credit card debt. How can this be, you might wonder; didn’t the bankruptcy discharge the credit card debt? Well, yes, the bankruptcy did indeed discharge your personal obligation to repay the $10,000 credit card debt, but the bankruptcy didn’t affect whether your car is subject to a lien for that debt. The terrible reality is that not only did you put the car up as collateral for the car loan, but by reason of the cross collateral clause, you also put the car up as collateral for the credit card debt (and any other debt you owe the credit union).

The result is that you have to choose to either pay both the $5,000 car loan and the $10,000 credit card debt if you want to keep your car, or you can surrender the car in the chapter 7 bankruptcy and discharge both debts. This is not a pretty choice — the aftermath of stepping on a land mine rarely is. In fact, some persons are forced into chapter 13, rather than filing chapter 7, due solely to the repugnant cross collateral clause.

How can you avoid being subjected to the bloody aftermath of a cross collateral clause? First, don’t bank or take out loans at a credit union; bank at a real live bank. Second, if you already have a car loan at a credit union, don’t incur any more debts there. Third, if you are already in this situation, pay off or otherwise get rid of the extraneous credit union loans. Keeping your car loan and credit card debts away from credit unions means you’ll never step on the cross collateral clause land mine.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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