If you are considering filing for bankruptcy, your debts will be categorized as those securing purchased properties (secured debts) and those that do not involve tangible property (unsecured debts). Your creditors will also be categorized similarly, depending on which type of debt you owe to each. In the case of debt owed to a bank or credit union, categorization varies based on “collateral.” Behm Law Group, Ltd. works to determine how collateral may affect you when you file for bankruptcy in Jackson, MN.
When you take out a loan through your bank or credit union, you give a security interest to that creditor. In the case that you fail to make payments on your loan, your bank or credit union can seize the property in which it has a security interest and sell it to satisfy the debt owed. In such a situation, such property is called “collateral”.
Collateral and Credit Unions
Banks and credit unions have two marked differences. First, credit unions do not operate for profit as banks do, and second, credit unions offer borrowing services that may include cross-collateralization clauses. Essentially, a cross-collateralization clause states that the security interest and a particular item of collateral may be connected to all your debts through your credit union.
This means that you may be able to take out a loan on a car from your credit union and you may also have credit card debt through your credit union card provider. A cross-collateralization clause may be attached to one of those debts tying the two together. Even if you pay back the full debt on your car loan, that car may still be sold as collateral if you stop making payments on your credit union credit card.
Debt Categorization and Cross-Collateralization
Cross-collateralization through a credit union can change the way your debts are categorized, which will, in turn, change the way those debts are handled in a bankruptcy case. For example, if you take out a loan through your bank to purchase a car, that debt is a secured debt because it is tied to and secured by the car. If you have credit card debt through that same bank, it is considered an unsecured debt because it is not secured by or connected to the car. In a Chapter 7 case, unsecured debts like credit card debts are discharged completely, and in a Chapter 13 case, you will only have to repay portions of those debts. However, if your car loan and credit card debt are taken out through a credit union and the credit union has a cross-collateralization clause, they both are considered secured debts. This means you will be required to repay both debts if you want to keep your car in a Chapter 7 case and to repay both debts in a Chapter 13 case.
If you are considering filing for bankruptcy in Jackson, MN, and have multiple loans through a credit union, you may have a situation where a cross-collateralization clause is involved. Contact Behm Law Group, Ltd. at (507) 387-7200 today for expert advice and legal assistance in your bankruptcy case.