Filing Bankruptcy and Keeping Your Car with Your Credit Union
The Small Print Says Your Credit Union Can Repossess Your Car If You Are Late on Your Credit Cards.
When you get a car loan from a credit union, you sign in small print that they can repossess your car if you don’t pay your credit cards. (I have never seen a bank do this; I don’t know why they don’t.) That would apply to a credit card you already had with the credit union, or one you get later. This is usually called cross-collateralization.
Credit Unions get you to sign in small print that they can repossess your car if you don’t pay your credit cards.
Credit Unions really do it, too. If you get maybe three months behind on your credit card payments with your credit union, they will apply your car loan payments to the credit card, and send the repo man to your house, to pick up the car.
How Does Bankruptcy Change That?
The basic rule of law is that secured debts–debts attached to something like your car–pass through the bankruptcy unaffected. So the deal may still be the same.
In my experience, once you file for bankruptcy, the credit unions will usually allow you to just pay the car loan. (Since the credit card is discharged, applying the car payment to the credit card would violate the bankruptcy discharge.) But once the car loan is paid for, they won’t send you the title. That’s because the credit card is still attached to the car and the credit card has not been paid off. So, you never really have a paid for car.
If they want to be mean about it, the credit unions can just pick up the car. Because under the 2005 bankruptcy law, they are allowed to pick up your car when you file bankruptcy, even if you are current. (I explain that, here.) I’ve seen Alaska Credit Union and Suncoast Credit Union do that. (There are probably others that do. There are 7000 different credit unions; I barely know seven.)
The Credit Unions around here will give you a chance to reaffirm the loan. That means you make a new, after-bankruptcy promise to pay, and they agree to accept it. When that new promise is paid off, they should send you the title. (They “should” send you the title. The reaffirmation form, set by law, says nothing about that. I got into a fight with Apple Federal Credit Union on that, once. Apple, an outfit we like, then agreed to send the title.)
Ordinarily, I do not like to reaffirm car loans, as I explain here. But you do get something when you reaffirm with the credit union. You get the title when the reaffirmed loan is paid off. So if you want to, I’ll sign your reaffirmation. (I charge $100 for doing the very annoying form.)
Do They Ever Negotiate?
Recently, I had a client who had two car loans with PenFed Credit Union. On one, he was about break even; on the other, he owed $11,000 and the car was only worth $8,000. He told me to tell PenFed, “I won’t reaffirm for more than the car is worth.” So, I crossed out his agreement to pay back $11,000, wrote in $8000, and sent it back to them. They told me, “We’re not negotiating on the loan; we’re coming to get the car.” “Don’t do that,” my client said, “I’ll sign.”
As your lawyer, I have to sign on your reaffirmation, that I helped you “negotiate” the reaffirmation. I’ve never actually negotiated any change from what the credit unions demanded. They will drop the credit card cross-collateralization; beyond that, they won’t budge.