Bankruptcy attorney Ben Tobey answering the question: Can I use my available credit to purchase items before filing bankruptcy?
When signing a loan application, you are required to read a lot of information contained in the agreement. However, the vast majority of those applying for a loan do not read the agreement altogether, while others do not pay attention to the fine print.
What many individuals applying for a loan do not realize is that the agreement may contain a cross-collateralization clause, which may create obstacles if they decide to discharge their debts through a Chapter 7 bankruptcy. What is cross-collateralization and how can it impact your bankruptcy filing in North Carolina?
What is Cross-Collateralization?
Most banks, credit unions, and other loan institutions use a cross-collateralization clause in their agreements in order to secure multiple loans with a single asset. Thus, by using cross-collateralization, a lending institution can turn what is usually considered unsecured debt into secured debt.
An example of cross-collateralization is when a bank uses a car as collateral to secure a vehicle loan and a credit card by the same bank. Cross-collateralization can be a problem for the borrower because they would not be able to get the title to a vehicle even after paying off their auto loan since the car is still collateral on another loan.
If you are considering filing for bankruptcy but are not sure whether your loan agreement contains a cross-collateralization clause, do not hesitate to contact a Chapter 7 bankruptcy attorney in North Carolina.
How Does Cross-Collateralization Affect Your Bankruptcy Filing?
What many borrowers do not realize is that cross-collateralization can impact their bankruptcy filing. In many cases, people are filing for bankruptcy to discharge credit card debt through a Chapter 7 bankruptcy.
However, if your automobile is used as collateral to both the auto loan and a credit card through cross-collateralization, you will have to make a tough decision. Let our Charlotte bankruptcy attorney at Arnold & Smith, PLLC, advise you on your options under your circumstances.
Dealing With Cross-Collateralization in Bankruptcy
If you have any cross-collateralized loans and are filing for a Chapter 7 bankruptcy, you usually only have the following four options to deal with cross-collateralization:
- Hand over the collateral to the lending institution (the most unfavorable option);
- Continue making payments on outstanding loans;
- Obtain a lien on the automobile by seeking a motion to redeem in a local bankruptcy court (this would require you to pay the value of the loan collateral in a lump sum); or
- Work out a loan reaffirmation agreement with the lending institution to change repayment terms.
It is important to discuss your particular situation with a bankruptcy lawyer to choose the most appropriate option under your circumstances. Here at Arnold & Smith, PLLC, our attorneys have a great deal of experience in handling complicated bankruptcy matters and helping our clients obtain the most favorable outcome. Schedule a consultation with our attorneys to determine your best option and help you navigate the legal process. Get a phone or video consultation by calling at (704) 370-2828 to speak with our detail-oriented and well-versed lawyers, or fill out our contact form. Now taking cases throughout North Carolina with offices in Uptown Charlotte, Mooresville and Monroe.
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