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Borrowing While Reorganizing Your Finances

Debtors are sometimes offered consumer credit while in Chapter 13 bankruptcy. It usually is not a good idea to incur new consumer credit because the whole point of filing for bankruptcy is to dig yourself out of debt so that you can start fresh once the debts are discharged. However, there are legitimate situations that may require you to borrow during bankruptcy.

In most cases, you will need to get prior approval from your Chapter 13 trustee or the bankruptcy court in order to take out a loan or get new credit during this process. “Borrowing” could mean any situation in which you agree to an installment plan, cosign a loan, or incur bills that you cannot pay in full at the time they are incurred. Sometimes there are explicit rules against borrowing in the order that confirms your debt repayment plan.

You should know that if you incur debt without court authorization, your Chapter 13 case could be dismissed, which means you would not accomplish your goals in filing for bankruptcy. Therefore, it is important to consult with your attorney about how to ask the court for permission to incur the debt rather than simply incur it and hope for the best.

Factors that may influence the court include how current you are on your plan payments, the type of credit you are requesting, the reasons why you are making the request, and the overall impact on your Chapter 13 plan. Getting a loan in order to cure a delinquency on your bankruptcy plan is not likely to be approved.

Generally, trustees and the court are more likely to permit you to incur new consumer credit when you can show special circumstances or an emergency. Special circumstances are those circumstances in which you have time to get approval, and the loan is necessary. A common special circumstance is taking out a loan to buy a replacement car or motorcycle that will allow the debtor to get to and from work and complete the plan. Another special circumstance would be a necessary home repair. The bankruptcy court or trustee will consider how necessary the loan is, the amount of the loan and its impact on your ability to stick to your plan, and whether the loan is secured or unsecured.

In a catastrophic medical emergency or a natural disaster such as an earthquake, you do not have time to obtain prior approval. However, your attorney and you should let the trustee know about the emergency because you may need to modify your plan to include the expense, or the creditor may need to file a proof of claim.

Consult a Los Angeles Attorney for a Bankruptcy Proceeding