Post-Petition Debts in Chapter 13 Bankruptcy

Getting a handle on "post-petition debts" in Chapter 13 bankruptcy is a big deal when you're trying to complete your plan and achieve a fresh financial start. This article explains why court approval is necessary for new debt, when a judge might grant it, and what could go wrong if you buy a car, washing machine, or something else you need on credit without first receiving permission from the Chapter 13 bankruptcy court.

What Is a Post-Petition Debt in Chapter 13 Bankruptcy?

A post-petition debt is any new debt you incur after filing for Chapter 13 bankruptcy. In contrast, pre-petition debts are those obligations you owed before you filed. The Chapter 13 plan accounts for all debts owed before filing for Chapter 13, with some being paid through the plan, and others being paid outside of the plan. For instance, the trustee uses the funds from the Chapter 13 payment to pay toward pre-petition credit card balances, medical bills, and personal loans. You would pay ongoing post-petition monthly household bills, such as rent and utilities incurred after the filing date, outside of the plan.

Example. When Gordon filed for Chapter 13, his monthly house payment was $2,500, but he was in arrears $8,000. His plan payment will include the $8,000 pre-petition mortgage arrears. However, he must directly pay each house payment as it comes due every month "outside of the plan." The monthly payments won't be included in his plan because they're owed post-petition. (This example is primarily for illustration. Some jurisdictions require the debtor to include monthly house and car payments within the plan when the payments aren't current at the time of filing.)

Why Is Court Approval Required for New Debt in Chapter 13?

The goal of Chapter 13 is to help you repay pre-petition debt and regain a fresh start, and because bankruptcy payment rules require all extra funds to go to creditors, most filers can't afford to take on new debt. Before the judge agreed to confirm (approve) your plan, you had to show that you were committing all of your disposable income to unsecured creditor payments.

In a nutshell, the basic rule is that unsecured creditors are entitled to all discretionary income for the duration of your plan. Therefore, in most cases, there won't be any funds left. But the court will review your finances just in case a new obligation jeopardizes your ability to complete the plan.

Learn how much unsecured debt you must pay in Chapter 13 bankruptcy.

When Might a Debtor Need to Incur New Debt in Chapter 13?

Chapter 13 plans last three to five years. It's an extended period, and it's common for things to happen. For instance, a debtor might need to make home repairs or replace a work vehicle, or might find themselves faced with unforeseen medical expenses. Necessary educational expenses might also become an issue. The common thread? You must be able to show that the financed property or services are necessary to complete the Chapter 13 plan or are critical to your or your family's well-being.

Example. Jennifer filed for Chapter 13 bankruptcy on January 1. All debts owed before January 1 were considered prepetition debts, including her credit card balances, gym membership, and cleaning charges from her former apartment, which were included in her repayment plan. However, on March 1, her refrigerator stopped cooling. She hired a repair person to fix it and received a bill for $200, which was a postpetition debt that wasn't included in the repayment plan, so she was required to pay it herself. However, suppose that the repair person couldn't fix it, and she couldn't afford to buy a new one outright. She would need to seek court permission before buying one on credit.

When Will the Bankruptcy Court Approve Post-Petition Debt?

Suppose you convince the bankruptcy judge that you have a necessary and justifiable expense. That finding alone wouldn't be enough because the judge doesn't have the authority to reduce the amount being paid toward certain debts. You must demonstrate that the bankruptcy rules allow funds to be diverted to cover the new debt.

For instance, you couldn't reduce the amount being paid toward domestic support obligations and most tax debts, because those debts must be paid in full. Attorneys' fees and administrative expenses also can't be reduced. You could only divert the amount you were currently paying toward debts that would be discharged at the end of the case, like credit card debts, medical bills, and personal loans.

The problem? Many Chapter 13 plans pay very little toward these debts. If you're in this camp, you won't be able to get court approval for a financed expense.

How to Get Court Approval to Incur Post-Petition Debt

The process involves submitting a formal request or motion to the court. In the request, you'll explain why you need to take out the debt. You must also outline the financial terms. This process can be cumbersome, especially when purchasing a vehicle, because you must identify a particular car, and the seller might not be willing to hold it for the time you need to obtain permission.

The process starts when you file a formal document called a "Motion to Incur Debt." The motion must include the item to be purchased and the financing details, such as "2019 Toyota Corolla, VIN No. XXXX, $15,000 sales price at 8% APR for 60 months, with a monthly payment of $XXXX." You'll also indicate why you need the vehicle or item, and explain how it will be paid.

For instance, the court might be able to reduce the amount paid to unsecured creditors, or you can demonstrate that a recent earnings increase could be used to purchase the car instead of increasing the payment amount to unsecured creditors.

It should go without saying that you should be current on plan payments before seeking approval to finance a new debt. If you're behind and you demonstrate you have further financial needs by filing a motion, the trustee could respond by filing a motion recommending dismissal of your case.

Example. During Charlie's Chapter 13 plan, his car becomes unreliable, making him increasingly late to work on a more regular basis. He finds a reasonably priced car that he'd like to finance. In his motion to the bankruptcy judge, he explains that he needs transportation to get to work so that he can make his monthly Chapter 13 payment. He also explained that he could make the payment without interrupting his plan because he had ensured that the new car payment wouldn't exceed the amount of his annual raise. The motion was granted because Charlie successfully demonstrated that the car was essential and that he could afford it.

What Role Will the Chapter 13 Trustee and Creditors Play?

The trustee and creditors will receive a copy of the motion and have an opportunity to respond in writing, and possibly argue the matter before the court if the judge schedules oral argument. You can expect the trustee to weigh in on whether the debt is necessary and whether the plan payment can be adjusted to accommodate it.

The trustee will also raise other factors the trustee might be aware of, such as any previous payment struggles you've encountered. While the trustee has a financial incentive to keep your case open—the trustee receives up to 10% of all payments—the trustee also has a duty to assess whether completing your plan is feasible.

Financial Management in Chapter 13 Bankruptcy

Everyone has good intentions when creating a budget and Chapter 13 plan. However, life doesn't always go as planned. You have a continuing obligation to amend bankruptcy petition Schedules I and J in response to financial income and expense changes. Here are some events that could surface during your case.

Winnings, recoveries, inheritances, and income. Sometimes discretionary income owed to creditors increases, but it isn't always due to a promotion, raise, or new job. You must also report inheritances, lottery winnings, and lawsuit settlement funds. Because such funds are often considered part of the bankruptcy estate, you'll likely need to use the money to pay creditors, up to 100% payment. If the increase is sizeable, it could be more economical to dismiss the Chapter 13 case and settle your debt outside of bankruptcy. However, determining the best decision could require a bit of math. For instance, you'd want to take into account whether you could exempt any portion of the funds, and compare whether it would be more costly to pay the trustee's fee or the interest and fees that would be reassessed if you were to dismiss, in addition to any settlement negotiation potential.

Living expenses. Inflation and other unforeseen events can cause rent, utilities, food, medical expenses, and more to rise unexpectedly during your case, making it impossible to manage without relief. Filers in this situation must often choose between requesting payment relief and converting to Chapter 7 bankruptcy.

Secured mortgage and car payments. If you're in Chapter 13 and want to keep a mortgaged house or a financed car, you must continue paying the monthly payment if it isn't included in the Chapter 13 payment. Because you'd have to pay the trustee's fee if you paid it through the plan, most filers are responsible for paying house and vehicle payments outside the plan through what are sometimes called "conduit payments." If you don't remain current, the lender can file a motion asking the court for permission to foreclose or repossess the property.

Common Post Bankruptcy Debt Questions and Answers

Here are a few additional issues you might encounter in your Chapter 13 case.

What are the risks of paying new debt outside of my Chapter 13 plan?

Risks include difficulty keeping up with plan payments, potential objections from the trustee, or case dismissal because income used for unauthorized new debts should be going towards plan obligations.

Can I get a post-petition debt approved after I incur it?

In rare circumstances, it might be possible if you can demonstrate that prior approval was impossible, obtain the new creditor's agreement, and the creditor submits a proof of claim. However, it's not the ideal approach and should only be considered when no other option is available, with the guidance of an experienced bankruptcy lawyer.

Can I convert to Chapter 7 bankruptcy if I incur large post-petition debts?

Yes, if you incur significant post-petition debts that you can't manage within your Chapter 13 plan, you could consider converting to Chapter 7, although such a plan would likely be more feasible in theory than in application. A more sound approach might be to dismiss the Chapter 13 case, address the issues, and then consider filing for Chapter 7 after your recovery if the final debt was more than you could afford to pay. Because incurring debt with the intention of not paying is generally considered fraudulent, this approach would likely be acceptable in very few situations—for instance, it might be possible to use it in response to an unexpected medical issue. Because of the small, fact-specific application, you should consult a lawyer about your options before moving forward.

Should You Speak With a Bankruptcy Lawyer?

Because the rules and procedures involved in Chapter 13 are complex, and procedures, requirements, and judicial discretion vary among different bankruptcy courts and jurisdictions, it's prudent to seek legal counsel. A bankruptcy lawyer will explain your options in and outside of bankruptcy. If you decide that dismissing Chapter 13 altogether is your best option, you can inquire about alternative financial management and budgeting tips, as well as payment plan negotiation. Some lawyers will even direct clients to helpful community services.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? We wholeheartedly encourage research and learning, and you can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. Additionally, information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.