December 13, 2009

Car loan and credit card: Credit unions not turning over title to debtors after car is paid off

It appears that with the tough economy, credit unions are starting to take a hard line when it comes to the cross-collateral provisions in their car loan agreements. If you have both a car and a credit card through a credit union, chances are that your credit card is actually secured by the car and so any default under the credit card means that the credit union can repo your car!

How this is playing out in the bankruptcy context these days is that debtors are reaffirming the car loan debt, paying off the car some time after the Chapter 7 discharge, but the credit unions are refusing to turn over title to the debtors after the payoff. When the debtors ask why the credit union won't release the title, the credit unions point to the "cross-collateral clause" in the security agreements for the car loan which often say something like, "This car is security for any other debt you may owe us now or in the future". You probably are not even aware that such a provision is in your agreement. I would argue that in a consumer context, it shouldn't even be enforceable, but apparently it is.

So theoretically, a debtor can end up in a position where they owe $5K on the car, but $15K on the credit card, with a car that is worth $4K, and after paying off the $5k, they won't get title unless they pay off the additional $15K! This is something you want to look into before you reaffirm your car loan debt. If possible, this is a scenario where you may prefer to "redeem" the car for its fair market value by paying the lender a lump sum - unfortunately, many bankrupt debtors are not in a position to do so.