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Cross Default

A very interesting case recently reminded me of the evil effects this clause can produce. Most (all really) banks have in their standard loan documentation.

When you sign loan papers at the bank, somewhere in there you are signing something that gives them the right to call in ALL of your loans, if you default on any one of them. Let me highlight this by a true, recent incident.
Couple own a home financed by a big bank (BB). Great credit history and NEVER missed a payment on the mortgage. They also have 2 Visa cards (the husband is the main borrower, so the main responsibility).  Also a truck loan for the husband.
The relationship goes sideways. These things happen, that is life. Lawyers get involved. Her lawyer says, don’t pay that Visa card, and let him look after it. His lawyer says, no way let her pay. So, the ONE visa goes in default. All other borrowings are maintained as agreed by the husband.

The mortgage matures in February of this year. BB advised the client that they will not renew him because of the “bad credit”. Really, they are invoking the Cross Default clause where a default on one loan instrument, constitutes a default on all. The client never, ever missed a mortgage payment and they are calling the mortgage because of a $3,000 visa debt!!
Refinancing is not easy, almost impossible because of the credit, and because this is a property where they got in with 5% and now the value of the home is less than when bought. This has been a nightmare for the client where parental had to be given.

I am not suggesting that this will be invoked in all cases, however, it is there and the banks can use it as a hammer. Credit Unions too by the way.

My experience where couples separate is that there are never any winners in a see/saw battle where husband/wife dispute ownership of a credit card or loan debt. Keep paying and sort it out in court.

Moral: The old adage “don’t put all of your eggs in one basket” might well be appropriate here.

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