Bankruptcy pitfalls–cross collateral/cross default clauses in consumer loans

It is common for families to develop a relationship with one lender and use this lender for all their credit needs. This works fine until it is time to file for bankruptcy. Then there are often surprises in store. Debts that were considered to be unsecured – credit card balances – are discovered to be covered by a cross-collateralization clause with the effect that the credit card balance is now secured by the family car. In order to keep the car, the credit card must be paid despite the bankruptcy. Cross default clauses work to give the lender the right to place all loans in default when one goes into default. Property thought safe because all payments were being made on time is not safe. Surprisingly, it is the family friendly credit union that is often most aggressive in raising these issues.

When considering a bankruptcy, it is prudent to review all of your credit agreements and loan documents–or have your bankruptcy lawyer review these documents– so that these costly surprises can be avoided.