In bankruptcy, debtors often wish to discharge their unsecured debt but keep their secured collateral. This is generally allowed in bankruptcy, but a practice commonly employed by credit unions makes this process more complicated and often more expensive. The reason is because credit unions often include cross-collateralization clauses in their loan documents. Cross-collateralization means that the collateral for one loan is also used as the collateral for another loan. This means that when you obtain an auto loan from a credit union, and also have a credit card through the same credit union, your credit card which is usually an unsecured debt may be partially or fully secured by your car. It is best to avoid the possibility of cross-collateralization by not taking out multiple loans or lines of credit with the same credit union. Traditional banks do not use cross-collateralization clause in their loan documents.
If you are unsure whether your loans are cross-collateralized, and/or need advice regarding how your debts will be affected by bankruptcy, contact The Wright Firm, L.L.P.