How to Get Credit When Your in Chapter 13 Bankruptcy
by Richard Fonfrias,
J.D. Chicago’s Financial Rescue &
Fonfrias Law Group, LLC
Most people will tell you that you cannot get credit or borrow money when you are in Chapter 13 bankruptcy. But that isn’t true. Here is what you need to know:
If you’d like to get new credit or borrow money while in Chapter 13, ou almost always need to get prior approval from the Chapter 13 bankruptcy trustee or the court. Here is what the trustee will consider before giving you permission:
1. Are your payments into your Chapter 13 plan current?
2. Are you wanting to borrow money or get credit to correct a situation in which you are already delinquent?
3. Is your request for credit for a business or consumer purpose?
4. What is the reason that you want to incur this debt?
5. Will this new credit or loan have any impact on your Chapter 13 plan?
New Credit for a Consumer Purpose
This type of credit includes any situation where you borrow money, agree to a periodic payment, or take on bills that you cannot pay in full when you incur them. Consumer credit also includes any time you co-sign a loan or guarantee a debt for another person.
Here’s What To Do: Companies will probably offer you credit during your Chapter 13 bankruptcy. And if you have an emergency, and if the bankruptcy trustee or court gives you permission, then you can accept the credit offer. It’s a good idea to check your bankruptcy trustee’s website, where you will often find guidelines to follow if you want permission for new credit.
Exercise Caution: In most cases, the trustee will deny your request for credit unless you have special circumstances. If you incur new credit without the trustee’s permission and for a non-emergency, the court could conclude that you can’t follow the terms of your Chapter 13 plan and dismiss your case. Or not allow the new debt to be included in your Chapter 13 bankruptcy.
This means you would not get your bankruptcy discharge or achieve any goals you had in filing. So if you want to get new consumer credit, make sure you get the trustee’s permission before acting on it.
Here Are Times the Court Could Okay New Consumer Credit
A Real Emergency: If you have a genuine emergency and you aren’t able to get the trustee’s prior approval, then make sure you tell your trustee as quickly as possible after you have handled the emergency. Your new creditor may need to file a proof of claim – and you might need to change your Chapter 13 plan. Real emergencies typically involve unexpected medical needs, yet they could also apply to things you must do to protect your home or property due to weather or some other type of event.
Unusual Circumstances: In these non-emergency cases, you have time to ask for the trustee’s approval or authorization. This might include your need for a replacement vehicle, home repairs, or replacement appliances. The trustee will usually consider these factors:
1. Is the repair or replacement necessary before you complete your Chapter 13 plan?
2. What is the amount of the new loan?
3. What impact will the new loan have on your ability of make your Chapter 13 payments?
4. Will your new loan be secured or unsecured?
New Credit: Secured or Unsecured
Most credit that you get on an emergency basis is usually unsecured. But other types of consumer credit (after you file Chapter 13) is secured, meaning the creditor has a security interest in the property, which might be a car, home repair, or appliances.
Courts and trustees hesitate to allow consumer financing that gives a new creditor a security interest in non-exempt assets. This is because the property’s value protects the creditor in case you don’t finish your Chapter 13 plan. If, however, your new loan helps preserve the property’s value – such as a roof repair – the court or trustee may approve it.
New Credit for a Business Purpose
Business credit is any financial transaction related to running your business.
Credit You Incur:The federal Chapter 13 bankruptcy law allows you to keep running your business without needing to get a court order letting you operate your business on an ongoing basis. The law allows you to take on regular business credit on typical terms without asking for the court’s approval.
Credit Terms Out of the Ordinary: If you want to take on debt that you do not ordinarily incur in your business, then you will need to get the court’s prior approval. This might include buying a new truck or new machinery for your business. In this case, you simply file a motion with the trustee, court, and creditors. You explain that the purchase is needed, you can afford the payments, and that it will not have a negative impact on your ability to continue with your Chapter 13 plan.