Can I Get a Loan or Credit During My Chapter 13 Case?

Can you get a car loan or new credit card, or incur medical or other debts during your Chapter 13 bankruptcy? Find out here.

Most people look forward to eliminating debt at the end of their Chapter 13 bankruptcy case, not incurring new debts. A Chapter 13 plan lasts long enough, however, that you may need to incur new debt sometime during the plan. The Bankruptcy Code permits you to incur some kinds of new debt, but you will need to get the court’s permission in many cases. The following explains what kind of debt you may need and how to get it.

(To learn more about Chapter 13 and the repayment plan, see the Chapter 13 Bankruptcy Plan area.)

Credit You May Need During Chapter 13

The court may permit you to obtain new credit while you’re in a Chapter 13 plan. Here are some of the types of credit you may need during your plan:

  • A new car.  People commonly need to get a new car sometime during their Chapter 13 plan. Getting a loan from a conventional lender is difficult, but there are lenders who specialize in lending to people making Chapter 13 payments. Be prepared to pay a high rate of interest, however.
  • Medical expenses.  You may not think of this as incurring debt. But when you visit the doctor he or she gives you services and sends you a bill later. This is considered new credit under the Bankruptcy Code.
  • Taxes.  While some people get refunds, others will incur new tax bills at the end of the year.
  • Revolving credit, such as a credit card.  Some issuers are willing to give you a new credit card while you are still in Chapter 13, but most people open a secured credit card in an attempt to begin rebuilding their credit.

Options Other Than Getting New Credit

Sometimes it makes sense to consider other options, rather than take on new credit.

When Your Financial Need Is Temporary

If you are considering opening up a new credit card or incurring some other short-term debt because you’re having problems making ends meet, talk to the Chapter 13 trustee or an attorney before you do. Your Chapter 13 trustee’s office may be willing to let you postpone your payments or reduce them temporarily if your financial hardship is temporary.

Long-Term Changes to Your Finances

If your financial strain is more serious because you lost your job or for another reason, then you may need to modify your plan until you can return to work. Because Chapter 13 trustees’ procedures vary on how to deal with these circumstances, contact the trustee’s office or a local bankruptcy attorney. (To learn more about modifying your plan, see How to Lower Your Chapter 13 Plan Payments.)

Getting New Credit in Chapter 13

The court will permit you to incur new debt for personal, family, or household purposes if it is necessary for you to continue to make payments under your plan. Put another way, if you can demonstrate to the Chapter 13 trustee and the court that you need the credit so you can stay in the plan then the court is likely to allow you to incur it. For example, if you need a reliable car to get to work so you can earn money to make payments to the Chapter 13 plan, the trustee and court are likely to approve the car loan.

In most cases, you need to obtain the court’s permission before you incur substantial debts. There are some exceptions, however. (See below for more information.)

How to Get Permission to Incur New Credit or Debt

The procedures you must follow to ask the trustee and court for permission to incur new debt vary, so check with your Chapter 13 trustee or attorney to find out the specific procedures required in your bankruptcy court. Below we’ve outlined a typical process for getting a new car loan.

  1. Obtain a sample financing statement containing the loan’s terms (the length of the loan, interest rate, and monthly payments) from your dealership.
  2. Fill out the Chapter 13 trustee’s paperwork, which will likely be available on his or her website. The Chapter 13 trustee will weigh your need for the new debt with the impact the new debt will have on your ability to distribute money to existing creditors. Unsurprisingly, the Chapter 13 trustee will likely object if you want to buy an expensive luxury car at the expense of your existing creditors.
  3. File a motion asking for the court’s permission (the trustee may do this for you) and send the motion to your creditors, the trustee, the U.S. Trustee, and any other interested party.
  4. You may need to attend a short hearing in court, or the court may grant your motion without a hearing if nobody objects.
  5. If the court grants your motion, you will need to give a copy of the court’s order to your new lender. Lenders familiar with Chapter 13 may need to see this before they will give you the loan.

Keep in mind that the process could take up to a month or more, so try to plan ahead.

If this process will take too long, ask your Chapter 13 trustee’s staff to consider your request on an expedited or emergency basis. You can also ask the court to consider the request on an expedited basis as well.

Incurring Debt Without Permission

Sometimes people in a Chapter 13 plan incur new debt without getting permission from the court first. If this happens, you must contact the Chapter 13 trustee and file a motion asking for the court to approve the transaction anyway. The court will require you to prove that:

  • you didn’t have time to follow the procedures for getting advance approval, and
  • the person or company giving you the loan did not know that they needed the Chapter 13 trustee’s permission before giving it to you.

Making payments outside the plan if the court refuses to give you permission.  If the court determines that you did have time to ask for permission or that the lender should have known that permission was needed, then the court will probably not let you make payments to the creditor through the plan. This could make it very difficult for you to keep up with payments to both the new loan and your Chapter 13 plan and could ultimately cause your Chapter 13 plan to get dismissed.

A word of caution:  Some bankruptcy courts and trustees look unfavorably upon incurring new debt, so try to obtain permission before you incur the debt. If the court or the trustee take a very dim view of the new debt you’ve incurred without permission, your case could get dismissed.

When You Don’t Need Court Permission to Incur Debt

There are some instances in which you will not need to obtain the court’s permission to incur new debt during your Chapter 13 repayment period:

Tax liabilities. If you incur new tax debts, they can be included in your plan as an administrative expense without the court’s permission. This may not affect the amount you have to pay, however, because it might simply mean that your unsecured creditors receive less under your plan.

Small amounts: Some courts and Chapter 13 trustees have procedures to allow you to incur small amounts of debt without asking for permission. This makes it easy to deal with relatively small debts you might incur, such as a routine trip to a doctor’s office, without having to ask for the court’s permission. Consult your court and Chapter 13 trustee rules and policies, which are likely posted online.

You don’t want to have the debt included in the plan.  If you want to make payments to the new creditor outside the plan, you can incur the debt without court permission. This is usually not a good idea because you will lose the ability to discharge the debt at the end of the plan, and it may be hard for you to keep make payments to both the Chapter 13 plan and the new debt. Moreover, if you are spending too much money on the new debt instead of your Chapter 13 plan, the Chapter 13 trustee may object, which could cause your case to get dismissed.

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