50 Main Street, Suite 1000, White Plains, NY 10606 CALL 914.206.9614

6739 Myers Road, East Syracuse, NY 13057 CALL 315.422.1234

Cross Collateralization

When you borrow money by taking out a loan from a bank to buy something most people think they are borrowing a given amount of money to buy a particular thing. E.g., $10,000.00 to buy a car. $100,000.00 to buy a house, and a credit card with a loan amount of $5,000.00.

If all three of these loans are with a credit union, you may get in trouble if you file bankruptcy. These loans may be “cross collateralized” which means that the all of the property that you bought (House and Car) is pledged for all three loans (House, Car and Credit Card). This means that if you file bankruptcy and want to get rid of the car and credit card debt, you will not be able to get free and clear title to your home until the debts for the car and credit cards are paid off as well!

In the case of Renshaw v. Clearview Federal Credit Union, (Bankr. W.D. Pa March 14th, 2011) the Court in Pennsylvania ruled that §502 of the Bankruptcy Code made a credit card debt secured by the collateral that was purchased by the debtor at the same bank.

When borrowing money from a bank, if you are using a credit union, make sure the loans are secured only by the property you are pledging. Better yet, if you have accounts with a bank, make sure you take out only one loan for a particular piece of property or get a credit card from the bank, but do not consolidate your property and debts in one institution in case you ever have financial problems.