September 25, 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.

 

Credit After Bankruptcy

Bankruptcy is not the end-all of credit many people believe it to be.  When used wisely, credit is an important part of our economy and financial lives.  This article details aspects of credit and building credit after filing a bankruptcy.

It goes without saying that filing bankruptcy negatively impacts one’s credit.  For example, a chapter 7 bankruptcy filing stays on a person’s credit report for 10 years while a chapter 13 bankruptcy stays on a person’s credit report for 7 years.  I never quite understood this difference in reporting other than people, somehow, are being rewarded for filing a chapter 13 bankruptcy over a chapter 7.  I do not have empirical evidence to support how much of a person’s credit score may be negatively impacted by the filing of a bankruptcy, but often times a person’s score dips below a 550.  FICO, or the main organization that mathematically determines a person’s credit score, indicates that the effect of a bankruptcy on a person’s credit score is determined by the person’s complete credit profile; therefore, depending on many factors, a credit score may be affected differently from one person to another when filing for bankruptcy relief.

But you can rebuild credit fairly fast after you file bankruptcy.  For example, I have written on the subject of reaffirmation agreements and secured debt, such as a car loan.  By reaffirming a car loan through bankruptcy, this will help rebuild credit after bankruptcy.  Reaffirmed debt (usually secured debt) will be treated as normal debt on your credit report, as opposed to debt discharged in a bankruptcy.  And continued timely payments on a reaffirmed debt will help bolster your credit score.

Clients are often surprised that when they file bankruptcy they receive many offers for credit cards and car loans; usually at very high interest rates, though.  The lenders mine the bankruptcy database to send newly-filed bankruptcy debtors credit card and car loan offers for two main reasons: 1) the debtor’s debt-to-income ratio has vastly improved (as the old debt was discharged in bankruptcy); and, 2) people can only file chapter 7 bankruptcy every 8 years and therefore the lenders feel more secure in lending.

I alluded to the debt-to-income ratio above.   By filing bankruptcy, you will get rid of most, if not all, of your debts.  As a result, your debt-to-income ratio (or how much debt you have compared to how much you earn) vastly increases.  This will make you more credit-attractive to lenders.

Now, what is the best way to rebuild credit after you file bankruptcy?  The number one thing is to pay current bills on time.  Second, you can open a secured credit card at a bank, where you secure the credit card with your own funds.  For example, you have $500 in an account, and you are issued a secured credit card for $500.  This secured credit card will be reported to the credit bureaus; so all payments made on time will have a positive impact on your credit score.  This type of credit card, however, will have an interest rate attached and often an annual fee.  The idea will be to use this card and pay it off every month; this strategy will help boost a person’s credit score.

There is also ample opportunity for unsecured credit cards as discussed above.

The bottom line, however, is this: if you use credit wisely and pay your bills on time, you can rebuild credit fairly fast after bankruptcy.

If you have questions about bankruptcy and how it may impact future credit, please feel free to call me today for a free in-office bankruptcy consultation to discuss this matter further.

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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