Getting Credit During Your Chapter 13 Bankruptcy

Getting new credit or a loan during your Chapter 13 bankruptcy case is difficult. However, in certain circumstances, it might be possible. You'll need prior approval from the court, which can be obtained by demonstrating that the loan is necessary and will ultimately help you continue paying creditors through the Chapter 13 plan.

Getting Credit in Chapter 13 for Personal Needs

If you need to buy something on credit for you or your family's personal use—such as a car or washing machine—it's considered consumer credit. Chapter 13 rarely involves business debt because businesses, except sole proprietors, can't file for Chapter 13 bankruptcy.

Taking out new consumer credit would include:

• a new loan
• agreeing to an installment payment, or
• incurring any bills that you're unable to pay in full when they're incurred.

It extends to more than just debt incurred for you. It will also include guaranteeing debt for someone else or co-signing a loan.

When You Can Get a Loan in Chapter 13

Not all situations are the same. Here are the basic rules regarding when you can and cannot get credit in Chapter 13.

Not allowed. You'll likely be offered consumer credit during your Chapter 13 bankruptcy, but absent a genuine emergency or trustee or court permission, it's best to avoid temptation. It is not likely that the trustee or the court will authorize you to incur new consumer credit without a showing of special circumstances. If you incur consumer credit for a non-emergency without court authorization, your Chapter 13 case could be dismissed, and you won't receive a discharge or accomplish any other purposes for your filing. In many districts, a prohibition against post-petition credit is set out in the order confirming your plan to avoid confusion.

You'll need court authorization. Most courts require that you get prior authorization for new credit. Some districts provide general guidelines for new credit approval. Check your court or the website of the Chapter 13 bankruptcy trustee.

If you incur debt or get credit without prior authorization, the court might view this as an indication that you can't comply with the terms of your plan or that you aren't contributing all of your disposable income. The court might dismiss your case or refuse to include the new debt in your plan. You won't be able to discharge it if you can't pay it.

When the Court Might Approve Credit in Chapter 13 Bankruptcy

Although taking out credit after you file your Chapter 13 case generally isn't allowed, some exceptions exist. You must show that you're experiencing a genuine emergency or special circumstance.

Genuine emergencies. In the case of an emergency, it won't be possible to obtain prior approval, and none is expected under the bankruptcy law. However, informing the trustee as soon as possible might be a good idea. You might need to modify the plan to include the additional expense, and the creditor might need to file a proof of claim. Genuine emergencies usually involve catastrophic medical events but could involve emergency measures necessary to protect your home or other property in case of a storm or accident.

Special circumstances. These are situations where there is time to seek approval or authorization, and because of the particular nature of the circumstances, the post-petition consumer credit is approved or authorized. Probably the most common example is incurring credit to purchase a replacement vehicle. Other examples include non-emergency but necessary home repairs (such as roof repairs), and appliance or heater replacements. In these cases, the trustee or the court will generally look at factors including:

• whether it is necessary that the repair or replacement occurs before completing the plan
• the amount of the new loan and the impact on your plan (ability to pay), and
• whether the loan is unsecured or secured by collateral.

A car loan, home repairs, or appliance or furniture purchases will likely involve giving the creditor a security interest in your property. Courts and trustees are reluctant to approve financing that provides the new creditor with a security interest in prepetition nonexempt assets because the value of that property protects creditors if you don't complete your Chapter 13 plan. But if borrowing preserves value in the property (such as a roof repair), it might be allowed.

Paying for Credit Through the Chapter 13 Plan

If you're paying some creditors with discretionary income, such as holders of credit card and medical debt, you might be able to modify your Chapter 13 plan and divert the payment from those creditors to pay the new loan instead. It will depend on the debt types you're paying through your plan and the debt you take on during Chapter 13.

In a nutshell, anything you're paying toward a "dischargeable debt" (a debt whose remaining balance will be erased or "discharged" when you complete your plan) can be redirected toward a new qualifying debt. Talk to your bankruptcy lawyer about the available options.

Need More Bankruptcy Help?

Did you know Nolo has made the law easy for over fifty years? It's true, and we want to ensure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.