Credit unions are like banks in a lot of ways. They accept deposits, provide checking and savings accounts, and make loans like mortgage loans, car loans, personal loans and credit cards. But there are significant differences between banks and credit unions when it comes to filing bankruptcy.
Cross collateralization means that what you pledge as security for one loan also become security for a different loan. Suppose you borrow money from the credit union to buy a car. You pledge the car as security for the loan, meaning if you default the credit union can repossess the car. Everyone expects that. But, the agreement that you sign will almost undoubtedly include a cross collateralization provision that makes the car security for any other loan, such as a credit card. So if you have a credit card and default on those payments, the credit union can repossess your car even if you’re current on the car payments.
Reaffirm all or none
Because of the cross collateralizatio provision, if you want to keep your car in bankruptcy by reaffirming the debt, you will end up not only paying the car loan but the credit card debt as well. Without the cross collateralization provision you could reaffirm and keep the car but walk away from the credit card debt. The only exception to this is if you have a mortgage loan with a cross collateralization provision. If you are current on your mortgage payments when you file bankruptcy you can just keep making payments without reaffirming. The credit card debt will be discharged in that case.
Loss of membership
Once you file bankruptcy you will lose all privileges of membership, meaning you can’t have an account, borrow money, have a credit card or otherwise use the credit union as your bank.
Lien on accounts
The cross collateralization provision extends to the accounts that you have. That means that as soon as you file bankruptcy the credit union can freeze your accounts and take the money that is in them and apply it to whatever loans you have with the credit union.
What should you do?
If you bank at a credit union and have loans there, be sure to talk with your attorney before you file. If you have a car loan and unsecured debt, such as credit cards or a personal loan, you will have to reaffirm on both to keep your car. Is it worth it? If all you have is unsecured debt and accounts, you’ll lose the money in the accounts unless you reaffirm. Is it worth it to maintain a relationship with the credit union? Learn your options before you file.
If you have bankruptcy questions, please contact us.