Cross collateral clauses state that any debt you accrue through the credit union will become secured with collateral you acquired by taking out a loan from the credit union. This collateral usually is your car. For example, if you go to the credit union and take out $20,000 for a car loan, the credit union will usually include a “cross collateral” clause on the loan document that states that your car will secure any other debt you accrue through the credit union. That means if you later take out a credit card through the credit union and charge up $5000 in debt, that money will be secured by your car. If you default on the $5,000 in credit card debt, the credit union could repossess your car to satisfy the debt.
This cross collateral clause can become tricky for debtors filing Chapter 7 bankruptcy . Even if the bankruptcy court discharges your credit card debt, the credit union could demand that you either pay both the car loan balance and the credit card debt or surrender the car. The only way to avoid this scenario would be to file Chapter 13 bankruptcy . However, you could also avoid taking out both a credit card and car loan at a credit union. Traditional banks do not use the cross collateral clause.