“Let the Borrower Beware” When Dealing With Credit Unions
Most credit unions and some banks use “Loanliner” documents. These agreements are standard loan documents developed by CUNA Mutual Group and sold to financial institutions. Over 70% of all credit unions use Loanliner documents for their lending transactions. Included in standard Loanliner lending agreements is a provision in which the borrower agrees that all other loans with the lender are cross-collateralized.
Cross-what?
Cross-collateralization is basically the use of collateral from one loan to secure other loans. The cross-collateralization clause from a recent Loanliner agreement reads: “the security interest also secures any other loans, including any credit card loan, you have now or receive in the future from us and any other amounts you owe us for any reason now or in the future.” Credit unions are fond of using this clause in vehicle loan agreements to secure all other credit union debts with the vehicle. This often causes surprises (and anger) when an unsuspecting credit union member tries to trade-in his car and discovers that the debt on the vehicle includes a personal loan, a line of credit, and credit card balances.
There are a few options if you are faced with a cross-collateralized auto loan. First, you can file a Chapter 13 and cram-down the loan to match your vehicle’s value. Any remaining debt is discharged at the end of the Chapter 13 case. During a Chapter 13 case, you can pay a cram-down over three to five years.
During a Chapter 7 case, your attorney can simply ask the credit union to draft a reaffirmation agreement for the vehicle without regard to other debts. You are basically asking the credit union to voluntarily strip off the cross-collateralized loans. If the credit union refuses your request, you have two options: (1) surrender the vehicle and discharge all debts to the credit union; or (2) redeem the vehicle. Redemption is a process exclusive to a Chapter 7 bankruptcy case where the debtor keeps a vehicle by paying the value of the vehicle, not the total debt that is owed. While similar to a Chapter 13 cram-down, redemption differs in that the payment to the secured creditor must be a lump sum. Payments are not permitted.
If you have an auto loan through your local credit union, review the loan paperwork with your attorney for a cross-collateralization clause. Your bankruptcy attorney can discuss your options with you and help arrive at the best financial decision for your family.
Can I Keep My Vehicle After Chapter 7 Bankruptcy?
Chapter 7 is an erase-your-debts-start-fresh bankruptcy. A debtor in Chapter 7 is unable to pay his creditors over time, so he offers to liquidate his assets. The basic idea is that all of the debtor’s property is taken and sold to pay creditors. Any debt that cannot be paid from the debtor’s property is legally discharged. The debtor has paid all he can.
However, it’s not practical to take everything a person owns. Consequently the federal bankruptcy laws balance the rights of the creditors to receive payment against the need of the debtor to remain able to provide food, clothing, and shelter for his family. The bankruptcy laws allow the debtor to keep reasonable and modest amounts of furniture, clothing, jewelry, and, in most cases, a home and car.
Keeping a vehicle after filing Chapter 7 depends on three questions. First, “Is the vehicle worth more than you owe?” Vehicle equity must be protected with exemptions. The bankruptcy laws allow a Chapter 7 debtor to keep a modest amount of equity in a vehicle, and other exemptions may be available to protect larger amounts of equity. In basic terms, if you have a new Cadillac, and it is paid for (meaning a large amount of equity), the car will be taken and sold to pay creditors.
Second, “Is the vehicle worth less than you owe?” In some cases the debtor’s vehicle loan is a great deal more than the vehicle is worth. In those cases the bankruptcy laws allow the debtor to pay the amount the vehicle is worth and discharge the difference. This process is called “redemption” and the fair market value of the vehicle must be paid to the creditor in one lump sum. Additional financing is often required to obtain the lump sum payment, although the money can come from any source.
Since a loan secured by a vehicle must be paid or the vehicle returned, the final question is, “Are you able to continue making payments?” If you are unable or unwilling to make the monthly payment, the vehicle may be surrendered back to the creditor, and you owe nothing. If you want to continue making payments on the auto loan, you should discuss a reaffirmation agreement with your attorney. Generally, a reaffirmation agreement is filed with the bankruptcy court and continues the loan obligations of the lender and borrower.
If you are interested in keeping your vehicle after a Chapter 7 bankruptcy case, speak to your bankruptcy attorney and discuss your options of surrender, reaffirmation, or redemption. Your attorney can explain the benefits of each process and map out a plan to keep your vehicle before you ever file your case.
Creditors You Intend To Pay
Almost all debtors in bankruptcy are honest people who have experienced great financial difficulty. One of the most common questions asked by debtors is, “Do I need to list a creditor I intend to repay?”
The answer to this question is very simple: “Yes!” You must list all of your debts and each of your creditors, even those you intend to repay. There are two ways to repay a debt after bankruptcy. The first is by voluntary payment. The second is with a reaffirmation agreement.
Voluntary payments made after your bankruptcy discharge neither create a new legal obligation nor invalidate the discharge order. Any payment you make on a discharged debt is the result of a moral obligation since the legal obligation to pay the debt has been discharged by the bankruptcy court. The creditor is still prohibited from contacting you or trying to collect on the debt.
A reaffirmation agreement is a new contract between you and your creditor. It is fully enforceable after the bankruptcy, so if you default on the obligation the creditor can sue you and repossess any property securing the agreement. Reaffirmation agreements are commonly used to continue auto and home loans. The debtor agrees to continue the legal obligation to pay the loan, and the lender agrees to not repossess the collateral.
Reaffirmation agreements are only available to Chapter 7 debtors and the agreement must be executed before the bankruptcy discharge is entered. The debtor can revoke the agreement with 60 days after the agreement is signed. The Bankruptcy Code requires that the debtor demonstrate that the paying a reaffirmed debt will not create an undue hardship for the debtor or the debtor’s family. While a reaffirmation agreement can be used for credit card agreements and other unsecured loans, bankruptcy courts are reluctant to approve these agreements without exceptional circumstances.
You are free to continue to pay a debt after your bankruptcy. Congress specified in the Bankruptcy Code that “Nothing contained in. . . this section prevents a debtor from voluntarily repaying any debt.” There are several legal options for repaying a debt after bankruptcy, as well as several avenues for debt restructuring. Discuss your specific situation with your bankruptcy attorney and discover your options.