Reaffirmation of Debt: Don’t Forget the Power of Cross-Collateralization

I am often called on to help my clients with the process of securing reaffirmation agreements when a Borrower becomes a Bankruptcy Debtor. What some lenders don’t realize, however, is the power of the cross-collateralization clauses contained in the loan documents. When properly included in the loan documents, cross-collateralization clauses can be a powerful tool for the Lender to secure reaffirmation of not just the loan(s) on Debtor’s vehicle(s) but also the Debtor’s credit card debt, personal loan, or line of credit with the same Lender.

Specifically, a cross-collateralization clause in the loan documents stating that it applies to all past, present, and future loans allows the Lender to place a lien against the Debtor’s vehicle(s) for credit card or other normally unsecured debt owed to the Lender. Accordingly, the Lender’s otherwise unsecured debt is, in fact, secured.

As a practical tip, reaffirmation agreement(s) for the other (otherwise unsecured) debts should: (1) list the loan(s) as secured; and (2) be sent to Debtor’s counsel along with the reaffirmation agreement(s) for the vehicle(s) Debtor intends to keep.

If you have questions about whether  the language in your loan documents is sufficient to secure reaffirmation through cross-collateralization, please contact the attorneys at Goosmann Law Firm, PLC today.