Banks and other lenders want to be paid, and one of the best ways to ensure they get paid is to require a guarantee to guarantee payment for the money a business borrows. Small business owners should carefully review their loan agreements before signing them. One of the provisions you should pay attention to is a cross-guarantee clause, which means that your business gives the bank more rights than you think. Because credit unions take care to minimize losses for their respective organizations, these lenders typically use mutual guarantees to secure payment for the loans they issue. Many choose credit unions because they usually offer certain advantages over banks. You can get a better interest rate on a loan, a higher credit limit, less fees, or more personal attention. But credit unions also frequently practice cross-guarantee – a term most have never heard of and rarely pay attention to when scanning the fine print. If you have loans or debts with a credit union, it`s important to pay attention to the mutual guarantee potential when filing for bankruptcy. Expecting debt relief from your unsecured loans while maintaining all your assets may not be an option if your credit union has a cross-guarantee clause in the contract. It is unlikely that another lender will use collateral for their loan if there may be a pre-existing lien on a property. Another suggestion is to avoid borrowing from a credit union if you`re worried about unknowingly signing a cross-guarantee agreement. The lender could use the car as collateral for your personal loan. If so, this is a perfect example of a cross-collateralization agreement.
For example, if you`re already paying for a car loan and the new loan you`re applying for now is for the same car as collateral, chances are it`s a cross-guarantee agreement. Article 9, Section 204(c) of the Uniform Commercial Code permits the use of cross-warranties. This provision was adopted by most States at the time of publication. As a result, the courts will generally maintain the enforceability of the search between warranties and grid clauses. According to the USLegal website, the courts will give a narrow interpretation of grid clauses given their scope and scope; The courts will consider a variety of factors, including whether each party to the loan was aware of the clause and understood its implications. You take out a loan to buy a car from your credit union, and the loan includes a cross-guarantee clause. You later open a credit card account with the same credit union and maximize the line of credit. Time passes, you pay off the car, but you still have a balance on the credit card. If you can`t make payments on the credit card at any time, the credit union can repossess and sell your car to pay off the credit card debt. In the context of bankruptcy, cross-guarantee also means securing general unsecured debts prior to pre-shipment by means of guarantees that guarantee post-petition loans. Another example of mutual guarantee occurs when a person can have a current account and a loan with the same bank.
If the person is late with the loan, the financial institution can withdraw money from the bank account or freeze the account until the loan becomes current. Because mutual collateral reduces the lender`s risk, credit unions often offer cross-debt-backed loans to offer borrowers lower interest rates.   Again, it can be used in the granting of loans. The guarantee of one loan is also used as collateral for another loan. A common example of this type of collateral is when an owner is allowed to use the property as collateral for a first and second mortgage. Technically, the mutual guarantee expires if the borrower has no outstanding loans from the bank. Lenders cannot use your company`s assets as collateral without your consent. Lenders obtain your consent to the mutual guarantee through a grid clause that may allow the lender to use the collateral for loans or other obligations that your business owes to the lender.
For example, if you default on an independent line of credit provided by the lender for the operating costs of your business, the lender may have the right to track the inventory you offered as collateral for another loan to pay off the debt on the line of credit. Cross-guarantee is a term used when the guarantee of one loan is also used as collateral for another loan.  If a person has borrowed a home-backed home loan, a car-backed car loan, etc. from the same bank, these assets can be used as cross-collateral for all loans. If the person repays the car loan and wants to sell the car, the bank can veto the deal because the car is still used to secure the home loan and other loans. Technically, the mutual guarantee expires if the borrower has no outstanding loans from the bank. In the context of bankruptcy, cross-guarantee also means securing general unsecured debts prior to pre-shipment by means of guarantees that guarantee post-petition loans. But mutual guarantee is a circumstance where debts that you think are unsecured could actually be guaranteed. And in these cases, debt relief is not an option without returning the guarantee. Instead, you have to pay the balance of the unsecured loan to keep the collateral. When you file a Chapter 7 claim, you must inform the court and creditors of what you intend to do with the real estate deposited as collateral for a loan.
Mr. Spivack helps you regain control of your financial situation. We offer a free personal consultation at our office in Cherry Hill, NJ. Mr. Spivack will give you honest answers to your questions and let you know what can be done to make the process for your specific problems as smooth as possible. The loans involved in the mutual guarantee do not necessarily have to be of the same type. The cross-warranty also includes the use of an asset, e.B. a vehicle, to secure various other types of financing or financing instruments, such as credit cards.
Consumers who file for bankruptcy while some of their assets are tied up in cross-collateral could seek to enter into reconfirmation agreements for all financing secured by that security. You would then continue to make payments on these loans to retain ownership of the property. Another option is to have the guarantees taken over. The debts secured by these guarantees would be settled at the end of the bankruptcy, but the assets would no longer be in their possession. Cross-guarantee simply means using the guarantee of one loan for another loan. How can this happen? If you borrow money from a credit union to buy something, the loan agreement may include a clause that states that the asset is not only the guarantee of the loan you just obtained to buy it, but is also the guarantee of any other loan you take out through the credit union, including credit cards and personal loans. For example, consumers who receive financing from a credit union to purchase a vehicle could sign a loan agreement that uses the vehicle as collateral. What the consumer may not know is that the credit agreement may provide that the vehicle will also be used as collateral to secure other loans or credits that the consumer takes out with that credit union. The lien placed on the car from the initial loan would then apply to all other financial accounts that the consumer opens with that institution.
If you`re feeling overwhelmed by debt, bankruptcy isn`t your only option. Debt negotiations can be a powerful tool to reduce and eliminate debt over time, improve your credit score, and get your financial situation back on track. To learn more about how the U.S. Bankruptcy Court for the Western District of Pennsylvania addressed this issue, you should read the Court`s opinion in Renshaw v. .