November 21, 2017

Can I Take on New Credit While in a Chapter 13 Bankruptcy?

The Order Confirming Plan in a Chapter 13 Bankruptcy contains tight restrictions regarding obtaining new credit (for example, credit cards, car loans, etc.) while in a Chapter 13 Bankruptcy.  This post details these credit restrictions and when it is potentially allowable to obtain credit while you are in a Chapter 13 Bankruptcy.

Specifically, the Order Confirming Plan in a Chapter 13 Bankruptcy, that a Bankruptcy Judge signs off on, states that the “debtor shall incur no credit or debt obligations during the life of the plan without the trustee’s written consent unless made necessary by emergency or incurred in the ordinary course of operating the debtor’s business.” Therefore, in order to obtain credit, the trustee needs to approve such an activity, unless it is necessitated by emergency or incurred in the ordinary course of operating a business.  “Necessitated by an emergency” usually is very narrowly construed, and therefore I hardly ever rely on this provision when clients ask about obtaining credit.  An example of an emergency for which this provision could apply to would be a catastrophic medical occurrence, where obtaining timely trustee approval would be impossible.

The normal course, then, to obtain credit is to seek the Chapter 13 Trustee’s approval first.  The Chapter 13 Trustee will usually deny a request for an unsecured credit card, though.  The more usual forms of credit we may seek approval for would be in the form of student loans and car loans, for example.  In fact, the trustee has a special form designated for car loans, called the vehicle request form.  With the vehicle request form, a debtor in chapter 13 bankruptcy can find a vehicle and lending, complete the form, and send to the trustee for approval.  If the trustee approves this vehicle purchase (we usually know within a few days), the debtor in bankruptcy can purchase the car provided his or her budget can afford the car payments.

If you operate a business and your business relies on credit, there is a special provision that allows a debtor to incur credit without prior trustee approval if it is in the ordinary course of operating a business.  Usually, we let the trustee know at the beginning of the Chapter 13 Bankruptcy that we will be obtaining continuing credit while in bankruptcy for the purpose of operating the business.

If you have questions about bankruptcy and if you will be allowed to obtain credit during a Chapter 13 Bankruptcy, please call today to schedule your free in-office bankruptcy consultation.

 

Pursuant to 11 U.S. Code § 528: "I am a debt relief agency. I help people file for bankruptcy relief under the Bankruptcy Code."

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