Cross Collateral Clause

A cross collateral clause is a clause in a contract used by many credit unions for secured purchases such as a car that allows the credit union to not only secure the item purchased but also any other loans taken out at the credit union. The effect of this security lien is that it cannot be eliminated in Chapter 7 bankruptcy—the debtor will have to pay the full amount of all loans with the lender unless the debtor is willing to surrender the property back to the lender.

For example, suppose you take out a loan of $20,000 from a credit union to buy a car, then also accumulate $10,000 of debt on a credit card issued by the same credit union. Then you realize that you can't afford your payments, so you file for Chapter 7 bankruptcy. Without the cross collateral clause, you would have been able to discharge the credit card debt without paying anything over and above what would be available in a distribution to all of your creditors. Since most Chapter 7 petitioners have no assets that are available for distribution to creditors, the credit card debt could have been discharged completely without paying anything. However, Chapter 7 debtors must pay all secured loans in full unless they are willing to surrender the property. Hence, in this situation, you would have to pay $30,000 of the debt instead of just $20,000 to keep the car.