CHAPTER #21 Cross-Collateralization Agreements in Bankruptcy

When you open any kind of account at a bank or savings institution, or credit union, they will have you sign an agreement which gives them a right to take money out of any account you have, if you don't pay them on a loan as scheduled.

This means that if a bank repossesses a car and sells it for less than the remaining loan balance, they can take the money in your accounts at that bank without any warning. If you are a joint owner of an account with a relative, they can offset their loss on your debt by taking money from your joint account with your relative.

In a bankruptcy situation, regardless of whether or not you are filing a Chapter 7 or Chapter 13, or whether or not you are paying back a loan or getting rid of it, I recommend that you cease using that account, and move any deposits to another bank before filing your case. This prevents trouble, because the bank that has the loan no longer has any deposits of yours to take an offset from.

When your paycheck is directly deposited, you should change the deposit instructions with your payroll deposit. If you have a checking account, simply let the checks you have written go through, but do not put any more money in the account, and file your bankruptcy after your checks have cleared and the balance is as close to 0 as you can get it. You can start using your new checking account without fear of offsets, because you have no loans at the new bank.

Remember that cross-collateralization agreements extend to accounts on which you are a joint tenant. If your mother put you as a joint tenant on her account for convenience, the bank may offset your default against that joint account, even though it is your mother's money and she had nothing to do with your loan, because that money is half yours by law. (See the Chapter on "Joint Accounts with Parents.)

Problem: John has a savings deduction of $75 per payday going to a credit union he owes $2000 on a personal loan. He also has a checking account with the credit union. In his bankruptcy, he will be discharging his obligation on the loan. But, he signed a cross-collateralization and security agreement when he made the loan.

The Peter Francis Geraci Chapter 7 or 13 Solution: John has already given the credit union a secured interest in his savings, so he will lose what savings he has in an offset, but he certainly doesn't want the credit union to get his current paycheck. John opens a checking account at a bank near his house, changes his direct deposit instructions at payroll, and also instructs his payroll department in writing to stop automatically deducting $75.00 per payday for the credit union. He takes care of this before filing his bankruptcy.