During a Chapter 13 case, debtors are not supposed to incur new debt without court approval. The only exception would be an emergency requiring you to incur debt to preserve life, health, or property. So, what happens if you need to purchase a new car, incur a new home, or co-sign your child’s student loan for college? First, you need to petition the court for authorization to incur debt.
Incurring debt without bankruptcy court approval in Chapter 13 could have serious consequences. The Chapter 13 trustee may petition to dismiss your case because the new debt makes your Chapter 13 plan unfeasible. In other words, with the new debt payment, the Chapter 13 trustee believes you will not be able to make your Chapter 13 payments.
Examples of debts that require authorization to incur debt in Chapter 13 include, but are not limited to:
Some debtors might need a credit card for their employment. If so, talk to your Chapter 13 lawyer. In some cases, a credit card that is not in your name and paid by your employer might still require approval by the bankruptcy court.
The steps to request authorization to incur debt in Chapter 13 include:
Your petition should include supporting documents, such as the loan application, payment schedule, interest rate schedule, etc. In addition, the petition must include the reason for the debt, the proposed loan amount, the interest rate, the monthly payment, and the term of the loan.
File your petition with the court and serve a copy on the Chapter 13 trustee, all creditors, and other interested parties requiring service.
Schedule J is your expenses list. You must file an amended Schedule J showing your current expenses. Include the new payment on Schedule J as a payment outside of the bankruptcy plan.
If your income has changed, you must also file an amended Schedule I. Some courts require you to provide an amended Schedule I regardless of any changes and updated pay stubs for 60 days before the date of the petition to incur debt.
The court schedules a hearing for your motion for authorization to incur debt in Chapter 13. The Chapter 13 trustee or any other party may object to your petition to incur debt. If so, the court holds a hearing to listen to arguments for and against the motion.
In some jurisdictions, a motion to incur debt might be on the passive motion list. If so, a hearing is only held if the Chapter 13 trustee does not consent to the motion to incur debt or a creditor files an objection to your motion.
If you have a good reason for incurring debt and you can prove that incurring the debt will not prevent you from completing your Chapter 13 plan, the trustee and the court should approve your motion. However, having a Chapter 13 bankruptcy lawyer file and argue the motion on your behalf generally increases your chance of approval. An attorney understands how to present a compelling argument proving the debt will not inhibit your Chapter 13 plan.
Two of the most common reasons why Chapter 13 debtors file motions to incur debt are to purchase a home or a new vehicle. Most Chapter 13 cases require a 60-month repayment plan. During five years, you might need a new car or need to move for work, family, or other reasons.
Talk to your Chapter 13 bankruptcy lawyer before you sign any forms to incur debt or purchase a new asset. Your lawyer will give you a list of documents you need to gather before filing for authorization to incur debt.
Your lawyer also analyzes your current Chapter 13 plan and advises you of the parameters of the new debt, including the maximum debt the court is likely to approve, the range for the amount of the monthly payment, interest rate, and equity in the new asset. Exceeding the parameters could lower your chance of obtaining approval for new debt.
If you do not obtain approval to incur new debt, talk to your lawyer about your options. Depending on your current financial situation, you might be able to convert to Chapter 7. Converting to Chapter 7 means that you discharge your unsecured debts without making any more payments to the Chapter 13 trustee.
However, converting to Chapter 7 is not always possible. For example, you might not meet the income requirements for a Chapter 7 bankruptcy, or you could have assets that the Chapter 7 trustee would seize and sell in a Chapter 7 case.
You might be able to dismiss your current Chapter 13 case and refile for Chapter 13 relief after you incur the debt. However, do not attempt this without the assistance of an experienced Chapter 13 bankruptcy lawyer. In addition, there could be issues that prevent you from refiling, such as prior Chapter 13 filings, incurring debt immediately before filing a Chapter 13 case, issues with your income, and problems with the automatic stay.
You could have one or more non-bankruptcy alternatives to get out of debt. Ascend helps you explore your bankruptcy options. Our free bankruptcy and debt relief calculators help you compare your options for getting out of debt. Our Savvy debt payoff planner can help you pay off debts without bankruptcy.
Call or text us at (833) 272-3631 or contact us online for a free case evaluation. Our compassionate, friendly, and knowledgeable team members work with you to determine the best way for you to get out of debt.