A cross-collateralized loan is a loan in which the collateral has already been pledged as security for a previous loan. So, basically the same collateral (often a vehicle or other personal property) is used as security on multiple loans.
Some banks might offer cross-collateralized loans, but it is more common to find these types of loan being offered by credit unions.
Generally, obtaining a cross-collateralized loan might occur as follows: Borrower purchases a vehicle for which the lender is a credit union. Borrower later seeks a personal loan (maybe to pay off credit cards or consolidate other debt) or a credit card through the credit union and the credit union agrees to do so only if the borrower’s vehicle is used as collateral. So now the borrower has two loans secured by the same collateral (the vehicle).
Can a Cross-Collateralized Loan be Discharged in Bankruptcy?
Cross-collateralization creates a security interest in the collateral which cannot be removed though bankruptcy. So, this means you’ll still have to pay off the original loan and the cross-collateralized loan before the security interest on the collateral is removed.
If a borrower files for Chapter 7 bankruptcy his/her personal liability on the cross-collateralized loan can be discharged if he/she does not file a reaffirmation agreement on the cross-collateralized loan during the bankruptcy such that he/she cannot be personally sued on that debt after bankruptcy. However, the security interest in the collateral still does not get removed under these circumstances and thus if the borrower doesn’t continue making payments on the loan, then the lender can seek to repossess the collateral.
In a Chapter 13 bankruptcy, you might be able to reduce the amount paid on the cross-collateralized loan through a “cramdown” on the interest rate and/or on the value of the collateral. You should speak with an experienced bankruptcy attorney to determine if a “cramdown” is an option.
How Do I Find Out If My Loan is Cross-Collateralized?
If you are not sure if your loan is cross-collateralized or not, then one way to determine that is to simply ask your lender. Your lender will have a copy of the agreement you signed when you took out the loan and will be able to tell you if the loan is cross-collateralization. Alternatively, you should have received a copy of that agreement and can bring it to an appointment with one of our experienced attorneys to determine whether you have a cross-collateralized loan. Contact W M Law today for help.