A cross collateralized loan is when one item of collateral stands as collateral for all loans with that bank or credit union. This means that a vehicle can be collateral on both the vehicle loan and a signature loan. In order to obtain your title back on your vehicle, you must pay both loans. Most of the time when you are signing a cross collateralized loan you are not even aware you are giving your vehicle or other item of property as collateral on the credit card or signature loan. Cross collateralization turns what you thought was an unsecured debt into a secured debt. The best way to avoid a cross collateralized loan is not to have two loans with the same bank or credit union.
If you file bankruptcy and intend to keep the cross collateralized vehicle, you usually have to reaffirm both loans. Sometimes the collateral is a home, land or equipment and the cross collateralized loan is a credit card. Further, some banks and credit unions cross collateralize two vehicle loans, so that you must pay both vehicle loans in order to keep both of the vehicles.
Be sure to tell the attorney you speak with regarding your financial situation of any loans that you have with the same lending institution so the attorney can address whether the loans are cross-collateralized and your options of keeping the collateral. Cross collateralization of loans can drastically change the advice your bankruptcy attorney may give you regarding what kind of bankruptcy you should file, chapter 7 or chapter 13. In a chapter 13 you can keep one vehicle and surrender the other and not have to pay both loans in full.
Cynthia T. Lawson is the Managing Partner of the Bond & Botes Law Offices location in Knoxville, Tennessee. She holds a Bachelor of Science from East Tennessee State University, and a Juris Doctorate from University of Memphis, Cecil C. Humphreys School of Law. She currently serves as a Mentor for the Moment in bankruptcy.Read her full bio here.