Bankruptcy is a major step that someone can take if they’re facing more debts than they can handle. This decision can impact just about every aspect of a person’s life, including loans they have through their credit union.
For individuals who are considering bankruptcy, understanding how credit unions handle debts and the way they differ from traditional loans may help to reduce surprises during the process. One of the primary differences is that credit unions use lending practices that can affect more than one account at once, which makes how they’re treated in bankruptcy unique.
What is cross-collateralization?
Unlike other lenders, credit unions typically require a membership and may link several of their financial products together. This means that auto loans, personal loans and savings accounts may all be linked, which means that bankruptcy can affect all of those.
When a credit union uses one single asset, such as a vehicle, to secure more than one loan within the person’s financial profile, it is known as cross-collateralization. This isn’t always clear. It’s possible that the credit union agreement may tie together seemingly unrelated accounts without any warning to the individual.
Cross-collateralization can limit flexibility in bankruptcy. Even if one loan balance is paid or is eligible for discharge, the credit union may still have a lien on the collateral until all debts related to that collateral are resolved. This point alone can make it harder to retain property without taking care of the full balance.
There is also a chance that the credit union may exercise setoff rights. This means that it can apply funds that are in checking or savings accounts to pay for outstanding loan balances. The ability to do this is based on account agreements and the timing of the bankruptcy filing.
Determining how to handle these bankruptcy filings may benefit from the assistance of a bankruptcy lawyer. This individual can help you learn about your rights, responsibilities and how the filing may affect your credit union loan accounts.