Acquiring New Debt in a Chapter 13 Bankruptcy

Chapter 13 bankruptcy can help the bankruptcy filer, or “debtor,” get their debt under control – restructure secured loans (car loans, home equity lines of credit, etc.), pay pennies on the dollar for certain kinds of debt, stop a foreclosure and pay back arrears over three to five years, and much more. However, what happens when the debtor wants to or, more often, has to acquire new debt in a Chapter 13 bankruptcy? 

Can You Acquire New Debt in a Chapter 13 Bankruptcy?

Bankruptcy law discourages the debtor from incurring any new debt after the filing date, but because Chapter 13 repayment plans last three to five years, it can be difficult to go that long without acquiring any new debt (post-petition debt). Maybe the bankruptcy filer’s car has broken down and they need to purchase a new vehicle. Maybe they need to secure a home loan for a major repair, such as a roof replacement. Or maybe they have immediate medical needs that require a trip to the doctor, X-rays, etc., but don’t have cash available to pay for these expenses. So, what is the process for such situations? Is it even possible to incur new debt in a Chapter 13 bankruptcy?

Obtaining new debt during Chapter 13 is certainly possible, and depending on the reason, it may not be a complicated process.

Post-Petition Consumer Debt

Consumer debts are those debts incurred on behalf of the debtor for their personal, family, or household use. These are not business-related expenses. And there are a few caveats.

1. The debtor needs to show that you’re experiencing a genuine emergency or special circumstance.
2. The debtor generally needs court approval to acquire new debt in a Chapter 13 bankruptcy for a special circumstance, such as purchasing a replacement vehicle. A car loan, or similar loan, will likely involve giving the creditor a security interest in the property. Additionally, the debtor needs to be up-to-date on your Chapter 13 bankruptcy payment plan, and their request can not be a means to alleviate a Chapter 13 repayment plan delinquency.  However, in Baltimore, Maryland bankruptcy cases, there may be an easier, informal process available in certain circumstances.  
3. In the event of a genuine emergency, such as a significant health crisis, there is probably not time to obtain prior approval. In these instances, the debtor should inform their attorney and their Chapter 13 trustee of the incurred expense as soon as possible. The bankruptcy filer may need to modify the bankruptcy payment plan to include the additional expense and the creditor might need to file a proof of claim.

If the filer acquires new debt without prior court approval, a Chapter 13 involuntary dismissal can occur.

What if the Court Denies Your Request?

“If you don’t get the court to approve your new debt, all is not lost,” explains O’Neill.

• If a debtor has incurred significant post-petition debt and the trustee or court won’t allow them to include the new debt in their Chapter 13 plan, the debtor can convert to a Chapter 7 so that they can discharge the new debt. However, before conversion, the debtor must understand the impact that a Chapter 7 bankruptcy may have on their assets. For example, if you own real property or a vehicle that has equity, the Chapter 7 trustee may wish to sell those and distribute the proceeds to creditors. However, this is not always the case, as many times property either has no value to the Bankruptcy Estate, or the property can be exempted.
• The debtor could also consider dismissing the current Chapter 13 and filing a new Chapter 13. This new Chapter 13 would include the newly acquired debts. However, the court may not allow the debtor to refile immediately. Additionally, if the debtor refiles and has had two or more cases dismissed within a year, the automatic stay does not take effect at all, although you can petition the court to impose the automatic stay.

Questions About Acquiring New Debt in a Chapter 13 Bankruptcy?

Steiner Law Group is a boutique law firm that assists Maryland citizens with bankruptcy and financial restructuring services. We have helped hundreds of individuals, families and businesses discharge millions in debt. If you have questions about Chapter 13 bankruptcy, please schedule a risk free consultation or contact Steiner Law Group, LLC a Baltimore, Maryland law firm at (410) 670-7060 to learn more about bankruptcy options.