Credit unions are focused on people, not profits. Credit unions offer more than a friendly smile and a place to deposit your money. Credit unions are particularly adept at offering cross-collateralization clauses, also referred to as dragnet clauses, anaconda clauses, or future advance clauses.
When a credit union loans money to a consumer, the lender often seeks to protect its interest by having a borrower pledge collateral to secure repayment of the debt. Collateral is an asset pledged to a lender, until the borrower pays back the debt. In case of default, the lender has the right to seize the collateral and sell it. Sometimes lenders, particularly credit unions, insert cross-collateralization clauses to protect themselves against risk.
Cross-collateralization clauses make collateral that secures one loan serve as collateral for all loans the credit union has made to the borrower in the past, and may make in the future. This transforms all past, present and future loans into secured loans. Unfortunately, the borrower is often not aware of the cross-collateralization clause.
For example, John Smith secures a credit card via "PAYME" Credit Union and the credit card agreement provides "collateral securing other loans you have with us may also secure this loan." Two years later Mr. Smith obtains an auto loan in which his car also serves as collateral on "any other loans he has with the credit union now or in the future." Two years later Mr. Smith files for bankruptcy and PAYME Credit Union demands that he reaffirm (or repay) all loans with the credit union or it will repossess the car based on the credit card default.
In this situation, Mr. Smith must consider the practical implications of reaffirming two or more debts to a credit union to keep his car. Often, the vehicle is not worth the outstanding loan balances and the Mr. Smith will be in a better position if he surrenders the vehicle and discharges all debt owing to the credit union.
It is important to note that courts may invalidate these clauses if the borrowers successfully argue they were not aware of the clause, or did not understand it. However, courts will generally uphold these clauses when they consider the security agreement language to be clear, unambiguous and in keeping with the Truth in Lending disclosure requirements. The Truth in Lending Act Regulations provides that the statement: "Collateral securing other loans with us may also secure this loan," qualifies as a valid disclosure. Do not allow the murky language of dragnet clauses rob you of the fresh start the bankruptcy code is designed to give you.
More importantly, do not allow yourself to be duped into several cross-collateralized accounts with your credit union. Car loans remain a staple in the credit union loan portfolio. If you sign a security agreement with a credit union to finance an auto, tread carefully in all future transactions with the credit union. Be wary of credit union loans that are labeled "unsecured" or "signature loans" as they most likely have a dragnet, or "anaconda clause," waiting to put the squeeze on you.http://www.legalhelpers.com/legal_helpers/brc_articles_credit_union_loans.html
