If there is one thing I could suggest to any potential bankruptcy client, or anyone for that matter, it is to avoid credit unions at all costs. Well, at the very least, avoid getting an auto loan and a credit card with your local credit union. This is because most credit unions (and some other financial institutions) cross collateralize their loans.
If you take a look at your account numbers one will be XXXX-XXXX-01 and the other will be XXXX-XXXX-02. That “-01” and “-02” signifies that those are actually two parts of one account. If you fall behind on the credit card part of that account, the credit union has the right to call in the entire account, including your vehicle loan. This means that even if you have made every single one of your car payments, but can’t keep up on your credit card, the credit union can repossess your vehicle to satisfy the account.
It also means that I am in a tough spot when you come to me to file chapter 7 bankruptcy and want to include your credit union credit card but keep your vehicle. If this is the case, the credit union will say that you either have to pay all accounts or surrender the vehicle. I know it’s unfair. That’s why I am warning you now. We have a few options in bankruptcy, but none of them are full-proof:
- Option 1 is to redeem the vehicle at its current market value. Essentially getting a new loan for the current market value of your vehicle and paying off all of the cross-collateralized loans. However, the credit union has to agree on the current market value. There are companies that will assist in redemption.
- Option 2 is to settle with the credit union on all loans and get the lien released on the vehicle. Kind of like redemption, but without getting another loan.
- Option 3 is to pay off the credit card debt before you file. I am not sure that this is really advantageous because you still have to pay on the vehicle, but at least it avoids repossession.
- Option 4 is to avoid Chapter 7 all together and file Chapter 13 to pay-off the total amount of the loans over a 3 to 5 year period.
- Option 5 is to avoid the headache by just surrendering the vehicle and purchasing something newer and better.
I hope that this article will reach many of you in time so that you can choose Option 6 – do not get multiple loans with your credit union! Whatever you decide to do, please remember to mention if you have loans with a credit union when you see a bankruptcy attorney for a consultation. It will save them future headaches as well.