Sometimes you want to, or have to, incur new debt after you’ve filed for Chapter 13 bankruptcy. Often the best course of action is to get court approval for the new debt (called a post-petition debt) before you incur it. But this isn’t always possible. If you don’t get the court to approve your new debt, all is not lost. To learn about your options for post-petition debts in Chapter 13 bankruptcy, read on.
The debts included in your Chapter 13 repayment plan are those debts that you had on the date you filed for bankruptcy. (To learn how the plan works and what debts are included, see The Chapter 13 Repayment Plan.) Bankruptcy law discourages you from incurring new debt after the filing date without first asking for permission from the trustee and bankruptcy court.
Because the typical Chapter 13 plan lasts for 36 to 60 months, it might be difficult for you to go that long without any new debt. You might need to make home repairs, buy a new car, go to the doctor, or pay taxes, but not have the cash available to pay for these expenses because of plan payments and monthly bills.
Luckily, there are some options for incurring post-petition debts in Chapter 13 bankruptcy.
Post-petition tax debts get special treatment in bankruptcy. The court always allows tax creditors to file claims for post-petition tax debts and then the claim gets priority in payment. However, you may have to amend your plan to incorporate the increased tax payment into your payments. This might mean that your other unsecured creditors get a little less.
Consumer debts are those debts you incur on behalf of yourself, family or household, and not for your business. There are basically two ways to handle post-petition consumer debt in your Chapter 13 bankruptcy:
If you don’t want to include the new debt in your Chapter 13 plan, you do nothing and incur the debt without first getting court approval. In this situation, you pay the debt outside of your plan. At the end of your bankruptcy, the debt will not be discharged.
Unless the debt is relatively small, however, paying it outside the plan is often not a good idea. The additional debt might mean you won’t be able to complete your plan. And because your income belongs to your bankruptcy estate, spending it on unapproved consumer debt might invite a trustee objection or case dismissal if it interferes with your plan.
If you incur debt without prior court approval, you can try to get the court to approve the debt later by showing that it was not possible to get court approval ahead of time. You will also have to get the creditor to agree and to submit a proof of claim. At that point, you can include the debt in your plan. For example, if you incur unanticipated medical debt, you might be able to get those debts included in your plan.
Why would a creditor agree to include the debt in your plan? If the creditor files a proof of claim and the debt is included in your plan, the creditor will likely receive a smaller amount than if you must pay the debt outside of the plan. So why would a creditor agree to this plan? Some creditors will be willing to file a proof of claim because they can start receiving money sooner, rather than waiting to collect after your Chapter 13 case is over.
When might the trustee or court refuse to include the debt in your plan? If your medical or other bill is large, even if the creditor agrees to file a proof of claim, the trustee and court may refuse to include the debt in your plan if it would make your plan not feasible given your income.
If you are unable to get the debt included in your plan, the automatic stay still prevents this creditor from seeking payment during your Chapter 13 bankruptcy.
You can also handle post-petition debt by working through the trustee's office and seeking court approval before you incur the debt. Generally, the court will approve new debt, or an extension of credit, if you need to buy property or services to complete your plan. If are able to get prior approval, you can include the debt in your plan if the creditor files a proof of claim.
One common reason you might need post-petition credit is to buy a new car. Here’s how the approval process might work in this situation: You work out the loan terms with a car dealer. Then, you contact the trustee and explain why the car is necessary for you to complete your plan. For example, you could explain that you needed the car to go to work and earn money. Make sure you are current on your plan payments; it’ll be difficult to argue that you can incur new debt if you have already fallen behind on your plan payments.
If the trustee agrees with the purchase, then you file a motion with the court. Usually, if the trustee is on board, the court approves the extension of credit. At this point you submit a plan amendment to account for the new car payment and amend other bankruptcy documents (Schedules I and J pertaining to income and expenses) to show your ability to pay the new amount. You must make these amendments even if your new car payments are not much different from your old payments.
In this case, the car lender would have a secured interest in the vehicle and would receive the full contract price.
If you have to incur large post-petition debts (for example, medical bills) that the trustee or court won’t allow you to include in your plan, you might consider converting your Chapter 13 case to a Chapter 7 so that you can discharge the new debt.
To read more about converting your case, see When Can Chapter 13 Be Converted to Chapter 7?