For some people, a credit union seems like a great alternative to a bank. However, when an individual is facing difficult financial times, a credit union could become the enemy. Credit unions must abide by different rules than banks.
In bankruptcy proceedings, their loans and credit cards may present additional issues due to cross collateralization agreements.
This type of agreement is really a term contained in the agreement for a credit union loan, credit card, or checking account. The wording stipulates that all the loans and accounts with the credit union are connected. For example, the checking account serves as collateral for a credit union loan or credit card.
The credit union can tap the funds in this account without accountholder permission, using the money to repay the loan or credit card bill.
During bankruptcy, debts are classified as unsecured or secured, the second type of which is backed by collateral. How debt is classified determines whether it must be repaid following a bankruptcy filing. For example, nearly all credit cards are secured and due to this, credit card debt is usually eliminated or discharged during a bankruptcy.
When a credit card has an associated cross collateralization agreement, the bank will likely state that the credit card is a secured debt backed by the checking account or loan with the credit union. In general, secured debts must be repaid after bankruptcy.
Therefore, an individual may need to repay debt on a credit union credit card to avoid losing the money in the credit union checking account.
This makes taking out cash advances from credit union credit cards a very unwise move. A credit union can come forward even after the discharge of debt is issued by the bankruptcy court. Lawyers for those filing bankruptcy often negotiate with credit unions to release alleged security being claimed on the credit card.
