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.

By , Attorney · University of the Pacific McGeorge School of Law

Most people look forward to eliminating debt at the end of their Chapter 13 bankruptcy case, not incurring new obligations. However, a Chapter 13 plan lasts a long time, and you might need to take out new debt during the plan.

Bankruptcy law permits you to incur new debt, but you must get the court's permission in many cases. The following explains what kind of debt you might need and how to get court approval. You can learn more about Chapter 13 and the repayment plan in Chapter 13 Bankruptcy Plan.

When You Might Need Credit During Chapter 13

In most cases, you must obtain the court's permission before you incur substantial debts or obtain new credit while in a Chapter 13 plan. The most common expenses Chapter 13 filers incur include vehicles and major appliances, such as washers and dryers because unfortunately, they don't last forever. If something you can't afford to pay for outright breaks down, you might need to finance a new one.

In some instances, a Chapter 13 filer might want to purchase a new home—for example, if rental costs exceed the amount you'd pay toward a monthly house payment. In these cases, the debtor must ask for the court's permission before purchasing the item on credit (we explain the process below).

When You Can Get New Credit in Chapter 13 Bankruptcy

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. You must show you need the credit to stay in the plan before the court will allow you to incur it. For example, if you need a reliable work car to earn money for your Chapter 13 plan payment, the trustee and court will likely approve the car loan.

How to Get Permission to Incur New Credit or Debt in Chapter 13

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

  1. Obtain a sample financing statement containing the loan's terms (the loan length, interest rate, and monthly payments) from the lender and information about the car, home, or appliance you intend to purchase.
  2. Fill out the Chapter 13 trustee's paperwork, which will likely be available on the trustee's 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. Expect the Chapter 13 trustee to object if you want to buy an expensive luxury car at the expense of existing creditors.
  3. File a motion asking for the court's permission and send it to your creditors, the trustee, the U.S. Trustee, and any other interested party.
  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 must give the lender a copy of the court's order. Lenders must see this before approving the loan.

The process could take up to a month or more, so plan accordingly. If the problem needs prompt attention, your attorney can file on an ex parte (expedited or emergency) basis.

A word of caution: Bankruptcy courts look unfavorably on incurring new debt, so you'll want to make other arrangements, if possible. If you have limited options and must make a credit purchase, obtain permission before incurring the debt. Otherwise, your case could get dismissed.

Options Other Than Credit When You Can't Pay Your Chapter 13 Plan Payment

You'll likely want to consider other options before taking on new credit in Chapter 13 bankruptcy. Here are the basics.

When Your Financial Need Is Temporary

Talk to a bankruptcy attorney if you're having problems making your Chapter 13 payment meet due to a one-time expense, such as an unplanned vehicle repair. A lawyer can try to arrange an agreement with the Chapter 13 trustee to postpone your payments by a month or two if your financial hardship is temporary.

Don't expect a trustee to work with you much longer because filers must complete the plan within three or five years. Also, you'll have to repay the missed months immediately, so don't look at the postponement as giving you a financial break. You'll have to double up on payments when the postponement ends.

Plus, if you're making secured payments and paying interest—which will be the case if you're making a home or car payment through the plan—you'll also pay the trustee late fees, penalties, and additional interest. If you don't, you could have a hefty balance remaining at the end of your plan that you'd have to make up to keep the property.

Long-Term Financial Changes

Sometimes the financial strain is more severe—perhaps you lost your job or have ongoing medical expenses. A bankruptcy attorney might be able to help you modify your monthly payment so you pay less. You'll need to file a motion with the court requesting the modification.

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

Learn more about modifying your plan in How to Lower Your Chapter 13 Plan Payments.

Consult With a Bankruptcy Attorney

A bankruptcy lawyer can help with financial problems occurring during Chapter 13. For instance, the lawyer can advise whether you can modify your plan to accommodate the new payment or expense and will be familiar with the practices in your area.

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