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 want to get prior approval from the court. Also, you'll likely need to be current on your plan payments—not requesting a loan to cure a repayment plan delinquency.

(Find more solutions to issues that commonly arise in the Chapter 13 Repayment Plan.)

Getting Credit for Personal Needs

If you need to buy something on credit for you or your family's personal use—such as a new car or washing machine—it's considered consumer credit. 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.

Here are the basic rules.

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 probably 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. And 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 of the 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 Consumer Credit

Although taking out credit after you file your Chapter 13 case generally isn't allowed, some exceptions exist. You'll need to 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, it might be a good idea to inform the trustee as soon as possible. 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.

When the Court Might Approve Business Credit

The law is different when business credit is involved. In Chapter 13, business credit is any delayed payment transaction connected to the operation of your business.

Credit incurred in the ordinary course of business. In Chapter 13, the bankruptcy law allows you to continue to operate your business without having to obtain court orders. You're allowed to incur ordinary business credit on normal terms without court authorization or trustee approval. For instance, you will not need a court order to purchase inventory on routine terms which require payment in 30 or 60 days.

Credit incurred outside the ordinary course of business. You won't need to get prior court authorization if you're seeking to incur debt that isn't a regular business occurrence. For instance, the replacement or addition of a new delivery truck or the purchase or new machinery likely wouldn't be an ordinary business expense. You'd need to file a motion to authorize the transaction and show the trustee, the court, and your creditors that the item is necessary, that you can afford to make the payments, and that it won't negatively impact your ability to comply with the terms of your plan.

(Find out more in Small Business Bankruptcy.)