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Can bank take my money to pay car loan?

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Dear Bankruptcy Adviser,
If I file bankruptcy and have a credit card and car financed by the same bank where I have my personal checking account, can I opt to only reaffirm the car loan but not the credit card? Can the bank close my checking account? Can the bank freeze my funds? Can the bank decline my offer to reaffirm the car loan?
— Tom

Dear Tom,
In most cases, don’t fear banks when you file bankruptcy, but you and other readers should know that you need to proceed cautiously with credit unions. Credit unions are given much more latitude to collect on unpaid loans.

You might know the term “cross-collateralization” if you ever signed up with a credit union. In general terms, it means all your credit union debt and money are connected. If you have money in your checking account and you fall behind on your credit card, personal loan or car loan with that same credit union, the credit union can take the payment out of your checking or savings account.

I have seen a client’s mortgage payment bounce because a credit union took money out of an account to make a credit card payment. The credit union cannot take money out of other financial institutions to pay on a debt without a court order, but it can take money you have with them.

Traditional banks must obtain a court order before taking funds from your checking or savings accounts to pay a delinquent loan, even if the money is with the same bank. I have filed many bankruptcy petitions for clients owing quite a bit of money to a traditional bank while still keeping all their money in the checking or savings account with that same bank. I tell the client not to worry because the bank must receive a court order to take any money out of a checking or savings account.

There is one big exception: business accounts. If you have a business credit card or business loan (such as a Small Business Administration loan) with a bank and money in checking or savings account with that same bank, your money can be seized for failing to pay on the business debt.

You can also easily reaffirm your car loan with the bank and credit union as long as you are current on the loan at the time of filing bankruptcy or executing the reaffirmation agreement. A reaffirmation agreement is a legally enforceable contract, filed with the bankruptcy court, which states your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case.

Credit unions have claimed they can cross-collateralize unpaid loans that are discharged in your bankruptcy by refusing to give you the title to the vehicle once that loan is paid. When I am worried about the credit union trying to cross-collateralize the loans, I tell the client to reaffirm the loan. I believe that if the client reaffirms the loan for one balance, the credit union cannot argue later that the balance is higher.

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