Should I Surrender My “Cross-Collateralized” Collateral in my Chapter 7 Bankruptcy?
You may have heard of the principle of “Cross-Collateralization” and have wondered to yourself, what it means in regards to your Chapter 7 bankruptcy. How does it affect my Chapter 7 bankruptcy? Cross-collateralization clauses can be found in loan agreements you may sign with a lender. For instance, if you borrowed money from a bank to purchase an asset, the loan agreement you signed, may have contained a cross-collateralization clause in it.
What this clause does is, it makes the thing that you purchased, become collateral of the loan, and that collateral in turn, also secures another loan that you have with the same lender. To illustrate, let’s say you have a car loan and a credit card with the same bank, and the car loan agreement contains a cross-collateralization clause. The clause makes the car secured by the car loan, as well as the credit card debt. In a Chapter 7 bankruptcy, you would have to keep making payments on the car and the credit card in order to keep the car. Likewise, let’s say you have a car loan and a mortgage by the same lender. In that case, you would have to continue making both the car loan payments and the mortgage payments, otherwise, the lender could repossess either.
You will often see cross-collateralization clauses in loan agreements with a credit union, as opposed to a large bank. This is because cross-collateralization clauses are often used by credit unions as a means to provide good terms to customers, and it also reduces their potential loss exposure. Even though a credit union’s offer for an unsecured loan may seem very low and appealing, it may be secured by collateral because of the cross-collateralization clause found within the loan agreement. In a Chapter 7 bankruptcy, unsecured debts are wiped out or discharged, completely. The beauty of Chapter 7 bankruptcies is that it allows people to have a quick re-set button – the unsecured debt, such as credit card debt and medical bill debt, will all be discharged or wiped out, in approximately 3-4 months from the date your case is filed. However, cross-collateralization clauses in a loan agreement, will make an unsecured debt become a secured debt. This means that if you are faced with a cross-collateralization situation, the unsecured debt secures your collateral, such as your car, and that unsecured debt cannot be discharged in the bankruptcy if you want to keep your car.
If you are faced with assets that are cross-collateralized and you are struggling with your payments on those assets, as well as the unsecured loan that secures them, it may be best to surrender your assets to the lender. For instance, if you have two cars that are cross-collateralized with a personal loan through the same lender, you may want to think about whether you really need both cars. Is it worth the struggle and stress? If keeping up with the car payments and the unsecured loan payments is burdensome to you and your family, and is causing you stress or anxiety and is negatively affecting your daily life, then it may be best to surrender the cars in the bankruptcy and have the unsecured loan completely discharged all together through the Chapter 7 bankruptcy. It is important to remember that bankruptcy was designed as a remedy, to help those in challenging financial situations get in a better financial situation.
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Bankruptcy may not always be a perfect fix. It may require making tough decisions, such as whether an asset needs to be surrendered, in order to discharge debt that has become too burdensome to manage. To determine whether surrendering your cross-collateralized assets may be best for you in a Chapter 7 bankruptcy, you should consult with an experienced bankruptcy attorney. See us at LifeBackLaw.com!
