Many debtors considering bankruptcy often want to keep their car while discharging their unsecured debts such as a credit card.  But depending on how their car loan document was written they may not be able to keep their car without paying off both the car loan balance and the credit card balance.  How can this be?  Well, if a debtor has taken out a car loan from a credit union the loan document will usually include what’s called a cross collateral clause.

Cross collateral clauses state that any debt you accrue through the credit union will become secured with collateral you acquired by taking out a loan from the credit union.  This collateral usually is your car.  For example, if you go to the credit union and take out $20,000 for a car loan, the credit union will usually include a “cross collateral” clause on the loan document that states that your car will secure any other debt you accrue through the credit union. That means if you later take out a credit card through the credit union and charge up $5000 in debt, that money will be secured by your car.  If you default on the $5,000 in credit card debt, the credit union could repossess your car to satisfy the debt.

This cross collateral clause can become tricky for debtors filing Chapter 7 bankruptcy .  Even if the bankruptcy court discharges your credit card debt, the credit union could demand that you either pay both the car loan balance and the credit card debt or surrender the car.  The only way to avoid this scenario would be to file Chapter 13 bankruptcy . However, you could also avoid taking out both a credit card and car loan at a credit union. Traditional banks do not use the cross collateral clause.

(source: www.bankruptcylawnetwork.com)