Credit Unions and Collateral—Watch Out for Problems

If you’re thinking about getting a credit card through a credit union, there are a few things you should know. Credit unions often participate in a practice known as cross-collateralization, where they secure your credit card debt through other property loans you have with them.

If you open up a credit card through a credit union and you also have an auto loan through the same credit union, the credit union could repossess your car should you fail to make payments on the credit card.  Credit unions can be good for low interest credit lines, but they’re able to produce in part because of these types of practices.

Under the cross-collateralization process, if you want to keep your car, you’re going to have to make credit card payments. This can be an issue if you’re thinking about bankruptcy—most credit card debt is unsecured and can be discharged in bankruptcy. However, this type of collateral-backed payment is different. Speaking to an attorney is the best option in this situation. An attorney will guide you and let you know about any potential issues, as there are solutions through Chapter 13 bankruptcy.

Under Chapter 13 bankruptcy, you might only have to pay back the value of the property. If your property is valued at a lesser amount than your credit card debt, in certain situations, you only have to make payments to meet the amount of the property. For example:

  • If you have $11,000 in credit card debt and your vehicle is valued at $7,000, you’ll only have to pay for the $7,000 value of the vehicle, if your car loan meets certain requirements.
    Once your vehicle is paid for, the credit union will not be able to use it to secure the balance of the credit card debt, so you will be able to discharge it, if your car loan qualifies.

If a credit union is threatening to take your property, call us immediately for a free consultation.  The quicker you’re able to speak to an attorney, the faster we can work on a bankruptcy filing and provide advice that will work for you.

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