Law Office of Timothy E. Wilfong, LLC

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Law Office of Timothy E. Wilfong, LLC

20 S. Main Street, Phoenixville, PA 19460


Dangers of Cross-Collateralization Agreements


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Law Office of Timothy Wilfong

21 South Main Street

Phoenixville, PA 19460


What are the Dangers of Cross-Collateralization Agreements? 

Cross-Collateralization agreements mean that collateral for one loan is also used as collateral for another loan.  To expand this idea further, if an individual has borrowed from the same bank to finance a home mortgage, car loan, and credit card, then under a Cross-Collateralization agreement the home and car would be considered collateral for the Mortgage loan, Auto Finance loan, and Credit Card (all three loans).  If the person pays off the car loan and wants to sell the car, the bank may refuse to transfer the car title, because the car is still used to secure the home Mortgage loan and Credit Card. Unfortunately, Cross-Collateralization ends when the borrower has no outstanding loans with the same bank.  Please note, cross-collateralization also means the collateralization of general unsecured prepetition debt, (i.e. the Bank Issued Credit Card in this example) by collateral securing post-petition loans.  As a result, Cross-Collateralization agreements can negatively affect your fresh start after your discharge.


For example, John has a mortgage loan and personal loan with the same bank and he files for bankruptcy.  The personal loan is unsecured, but contains a Cross-Collateralization agreement that says “CROSS-COLLATERALIZATION: ANY COLLATERAL SECURING ANY OTHER LOAN AT THIS BANK SHALL ALSO BE COLLATERAL FOR THIS PERSONAL LOAN.” Because John’s house is collateral securing his mortgage, under the Cross-Collateralization agreement, the house also becomes collateral for the personal loan.


Next, John is granted his bankruptcy discharge and the Personal Loan, which is considered an unsecured loan pursuant to the Uniform Commercial Code (“UCC”), is discharge in the bankruptcy, and they bank cannot take any collection action against John for the Personal Loan. However, fast forward to when John makes his finale Mortgage loan payment, the Bank refuses to release his Deed, stating that the personal loan debt (even though it was discharged) would need to be paid, because John had signed a Cross-Collateralization agreement.  Therefore, the result after filing the bankruptcy was that the personal loan debt was discharged, but the Bank will not release the Deed to John’s house, because the house was collateral for the personal loan.


Another example of Cross-Collateralization is when an individual has a savings account and a loan at the same bank. If the individual defaults on the loan, the bank may take money out of or freeze the savings account.  

Please call for a free, no obligation, initial consultation with a bankruptcy lawyer to evaluate your specific financial circumstances to see if it makes sense for you to file for Bankruptcy at (610) 935-5555.  To ask a question or schedule an appointment please click here.

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Law Office of

Timothy E. Wilfong, LLC

20 S. Main Street

Phoenixville, PA 19460

Phone-(610) 935-5555

Fax-(610) 680-3910