What is Collateral?
When you borrow money, sometimes you pledge property as collateral, meaning the lender can take that property if you stop paying. This is called a secured debt. The most common examples are car loans and mortgages. If you fall behind on your car payments, the lender can repossess your car. If you stop paying your mortgage, the bank can foreclose on your home.
How Cross-Collateralization Works
Many people don’t realize that some lenders, especially credit unions, use a practice called cross-collateralization. This means they can tie multiple debts together using the same piece of property as collateral.
For example, say you have an auto loan and a personal loan with the same credit union. You owe $12,000 on your car loan, and your car is worth $18,000. At the same time, you have a $6,000 personal loan. If you want the title to your car, the credit union can require you to pay off both loans. So instead of paying just $12,000, you may have to pay $18,000 to clear the title.
Do You Have to Pay?
If paying off extra debt to keep your car doesn’t make sense, you do have options. In a bankruptcy case, you can surrender the car and walk away from the debt. If you surrender the car and walk away from the debt, you won’t owe the lender anything once the vehicle is returned.
Smart Tips for Avoiding Surprises
One way to protect yourself is to keep your checking and savings accounts (and vehicle loan(s)) at banks or credit unions where you don’t have other loans or credit cards. This helps avoid cross-collateral issues altogether.
If you’re facing this situation and need to decide whether to keep your car or surrender it, talk to a professional first. We can help you understand the pros and cons, so you can make the best choice for your situation.
The information provided on this page is for informational purposes only and does not constitute legal advice or create an attorney-client relationship. Please contact a licensed bankruptcy attorney to determine your bankruptcy options.