What the heck is “Cross-Collateralization”? Cross-Collateralization is a big word for “everything is connected.” This is a financial device usually used by Credit Unions to protect the Credit Union’s member's money. It basically ties all bank accounts, personal loans, lines of credit and car loans together. If you don’t pay one account with a Credit Union, they can take money directly out of your bank account to pay it. Let’s look at a common example:
Example #1 Sally loves her Credit Union, they know her by name when she walks in and she does all of her banking there. She has a savings account with them and has been saving up her money for a long time in order to pay for her daughter’s graduation party. She has almost $2,000.00 saved in her savings account. Sally also has a credit card and car loan with her Credit Union. She owes about $1,000.00 on her credit card and is making payments on her car loan. Sally loses her job. Unable to make her car loan payment or a payment on her credit card, Sally figures the Credit Union will understand and doesn’t make a payment for a month. Sally is forced to use the savings account money she has saved up to live off of until she finds a new job and she attempts to withdraw it all from her Credit Union savings account. The Credit Union refuses to give Sally her savings account money, and tells her they are allowed to keep this money, since this money is also “collateral” on her other loans, and until she pays those other loans, she can not have her savings account money, her account is now frozen.
Example #2 Bert loves his credit union, he does all of his banking there. He also has a credit card with his credit union with a small balance. Bert runs into some financial problems and determines that he needs to file a Bankruptcy case. He files the case and when he goes to his credit union to withdraw some money, discovers that his account and all of the money in his account is now frozen. He is not able to get this money back due to cross-collateralization. He is also not able to bank with the Credit Union again, even after his bankruptcy case is over.
Why should I be worried about Cross-Collateralization? As the above examples illustrate, cross-collateralization can have devastating effects on a person’s financials if they do not plan carefully. Having a credit card, personal loan or a car loan with a Credit Union can cause problems.
What happens when I file bankruptcy? When you file bankruptcy and you owe a credit union money, they will freeze your bank accounts almost immediately. It’s important to withdraw all of your money from your credit union account before filing for bankruptcy and open up a new account elsewhere. NO money should be left going in or out of your Credit Union account. You will not be able to close a Credit Union account if you owe money, it will just have to remain empty. You will not be able to bank with the Credit Union again.
What should I do? As a general rule, never keep your money with someone that you owe money to! Pick a bank that you have no “lending relationship” with (that means no credit cards, loans or lines of credit) to bank with. Speak with your attorney about your options.
Contact Attorney Allison Greenlee Korr at 269-381-4471 to schedule a free bankruptcy consultation today to go over your personal bankruptcy options.
“We are a debt-relief agency. We help people file for bankruptcy relief under the Bankruptcy Code”.