Typically, families that need Chapter 13 relief and have been Credit Union members have two vehicles. Often times, “buried in the fine print” of the security documents are so-called “cross collateralization” clauses that say, in common language, although both vehicles were not purchased at the same time and are on different promissory notes, they each are collateral for the other’s obligation. When one of those vehicles is “under water” and the Debtors want to keep the second vehicle that might have some equity or otherwise be worthwhile to keep, the issue of whether these “cross collateralization” provisions are viable comes into play in the Chapter 13 context.
Recently, a split has developed amongst the Courts with respect to this issue. Over the course of years, the practice in West Michigan has been to disregard these cross-collateralization provisions. However, the Fifth Circuit Court of Appeals (In re Williams, 168 F3d 845) cannot “surrender” one of the vehicles – they either have to surrender both of them of keep both of them. Also see, In re Barragan-Flores, 585 BR 397.
Although the case law on this favors Credit Unions, at least one of the cases that has addressed the issue has noticed that at least two of the major treatises on Chapter 13 (Lundin and Brown, Chapter 13 Bankruptcy § 102.1 (4th ed. 2011) and Ginsberg & Martin on Bankruptcy § 15.05[C][b] (5th ed. 2015)) disagree with the “all or nothing approach”. Moreover, as a practical matter, this writer has found that negotiation with the Credit Union’s counsel on a proactive basis solves this problem in almost every case. Both Debtors’ counsel and the Debtors, themselves, need to be aware of this issue but it is not one that should be deemed insurmountable by any stretch.