Reaffirmation of a secured loan is not a very good idea most of the time. Reaffirmation of a secured loan with a credit union can be a very bad idea if all cross collateral is not removed.
In a Chapter 7 bankruptcy, all non-exempt and unsecured debts are discharged after non-exempt assets have been liquidated and creditors paid. Secured debts are discharged if the filing debtor does not reaffirm the secured notes. During the bankruptcy, a creditor cannot repossess or foreclose on secured property without the consent of the bankruptcy court. The moment a bankruptcy closes, a creditor can repossess or foreclose on secured property if it so chooses.
Before a secured debt is discharged, the filing debtor has a legal right to reaffirm a secured note. Most secured creditors will reaffirm with the filing debtor because a reaffirmation favors their position. Once reaffirmed, the bankruptcy has no discharging effect on the debt. After reaffirmation, the debtor cannot have the debt discharged until it is once again eligible for bankruptcy, years later. That is why a bankruptcy court and/or the filing debtor’s lawyer have to sign off on any reaffirmation agreement made before the debtor is allowed to reaffirm a secured debt. Any deficiency occurring after a reaffirmation and default on a secured loan is collectible.
A reaffirmation of a secured loan with a credit union can provide a unique challenge for a filing debtor. Most credit unions use cross collateral paragraphs in their loan documents. Cross collateral is where you agree to allow any assets the credit union holds in your name to act as security for any debt you have with the credit union. The crossover allows the credit union to seize these assets in payment of a debt anytime a default occurs. These seizures can take place without the credit union taking you to court. An example of a cross collateral asset can be a savings account or another checking account. These assets can be seized and emptied to satisfy the full amount of the debt owed if the secured loan goes into default.
During a bankruptcy, a credit union cannot seize your accounts without the permission of the bankruptcy court because of the automatic stay. After bankruptcy discharge, though, a reaffirmation with a credit union might change matters if the cross collateral clause is not removed in the reaffirmation documents.
As an example, this testimony was given by a filing debtor on a bankruptcy forum website: “Discharged a little over 2 years ago. Reaffirmed my car loan with our CU. I paid off the car loan a few weeks ago and now they are holding my title and saying that they will repossess my car to pay off my discharged credit card with them. Is this correct?”
The filing debtor’s concern is appropriately placed if he or she failed to get the credit union to remove their cross collateral paragraph from the reaffirmation documents.
Most bankruptcy judges would not sign off on such a reaffirmation agreement, but it is possible there could have been a mistake. It is also conceivable a bankruptcy lawyer did not sign the undue hardship box on the reaffirmation if the filing debtor convinced him the agreement was not a hardship.
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