Cross-Collateralization in Bankruptcy

What is Cross-Collateralization in Bankruptcy? 

Individuals who apply for a loan and sign off on an application are responsible for all of the information which is contained in the agreement. However, many individuals do not read the small print when they sign loan agreements and other contracts, and they are not aware that these agreements oftentimes contain a cross-collateralization clause which is part of the agreement.

Moreover, these cross-collateralization clauses can create serious complications for individuals who are trying to discharge their debts by way of a Chapter 7 bankruptcy proceeding. 

The North Carolina bankruptcy lawyers at King Law Firm can review your financial circumstances and determine whether filing for bankruptcy is the best legal option for your case, considering all of your financial circumstances. If so, our dedicated legal team can help you throughout every step of the process. Please call us today to find out more about how we can help you with your bankruptcy matter.  

Defining Cross-Collateralization

Lending institutions, including banks and credit unions, use cross-collateralization as a way to secure more than one loan with just a single asset. By using cross-collateralization, a debt (such as credit card debt) that is normally an unsecured debt turns into a secured debt. For example, cross-collateralization occurs in a situation where a credit union uses a motor vehicle as collateral to secure both a vehicle loan, as well as a credit card which is issued by the same bank.

Impact of Cross-Collateralization on Filing for Bankruptcy

Cross-collateralization can have an impact on filing for bankruptcy. Many individuals file for bankruptcy – and in particular a Chapter 7 bankruptcy – in hopes of discharging credit card debt that has become unmanageable. However, in cases where a vehicle is also used as collateral to secure a credit card by means of cross-collateralization, the debtor may be faced with a dilemma.

With respect to loans which are cross-collateralized, individuals who have declared a Chapter 7 bankruptcy are left with the following options:

  • Continue paying on the loans which are currently outstanding
  • Hand over the collateral to the bank or credit union
  • Obtain a lien release on the motor vehicle by filing a motion to redeem in a bankruptcy court and paying the lump-sum loan value which is outstanding on the motor vehicle
  • Work with the bank or credit union to negotiate some sort of loan reaffirmation agreement, which would allow for repayment terms that are different from the bankruptcy loan agreement’s terms.

An experienced North Carolina bankruptcy attorney can help you decide which of these options would be best for you under your circumstances. 

Contact a North Carolina Bankruptcy Lawyer Today

At the King Law Firm, our legal team is committed to helping you make the best legal decisions for you and your finances. To schedule a free case evaluation and legal consultation with an experienced North Carolina bankruptcy attorney, please call us at (800) 635-1683 or contact us online today for more information.