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

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 a long time, however, and you might need to take out new debt 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. You can learn more about Chapter 13 and the repayment plan in Chapter 13 Bankruptcy Plan.

Credit You Might Need During Chapter 13

The court might allow you to obtain new credit while you're in a Chapter 13 plan. Here are some of the types of situations that arise and might cause you to need credit during your plan:

• A new car. Cars don't last forever. If yours breaks down, you might need to finance a new one. 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 might 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, you've incurred new credit under the Bankruptcy Code.
• Taxes. If you owe at the end of the year, that tax bill is a new debt you might need to pay over time. Learn about tax debt in bankruptcy.

Options Other Than Credit

Sometimes it makes sense to consider other options than taking on new credit.

When Your Financial Need Is Temporary

If you're having problems making ends meet, talk to a bankruptcy attorney. The attorney might be able to help you modify your monthly payment or arrange an agreement with the Chapter 13 trustee to postpone your payments if your financial hardship is temporary. Many trustees aren't willing to work with you in this manner, however, due to the requirement to complete the plan within three or five years.

Long-Term Changes to Your Finances

If your financial strain is more serious because you lost your job or for another reason, then you might need to modify your plan until you can return to work. You'll need to file a motion with the court requesting the modification.

Also, keep in mind that the court can only to reduce the amount you pay toward unsecured nonpriority debt, such as credit card balances, medical bills, and personal loans. You won't be able to lower what you pay toward secured debt, such as mortgages and car loans, or priority debt.

Learn more about modifying your plan in 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.

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 and information about the car you intend to purchase.
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 might do this for you) and send the motion to your creditors, the trustee, the U.S. Trustee, and any other interested party. If the trustee won't, you'll be responsible for serving the motion yourself.
4. You might need to attend a short hearing in court, or the court might 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 will 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, you can make your request on an ex parte (expedited or emergency) basis.

A word of caution: Bankruptcy courts look unfavorably upon incurring new debt, so it's important to obtain permission before you incur the debt. Otherwise, your case could get dismissed.

Consult With a Bankruptcy Attorney

If you need to get a loan while in Chapter 13 bankruptcy, your best bet is to contact a local bankruptcy lawyer. The lawyer can advise you as to whether you can modify your plan to accommodate the new payment and will be familiar with the practices in your area.