Bankruptcy / Chapter 13 / Personal Loans

Personal Loans While In Chapter 13

Written by Ben Tejes
Updated Dec 6th, 2022

Filing a Chapter 13 bankruptcy case can help you resolve your debt problem through a reorganization. The Bankruptcy Code provides a legal remedy for individuals who cannot afford to repay their debts. The Chapter 13 repayment plan can:

  • Reduce the amount you pay to unsecured creditors, including credit card debt and medical bills.
  • Lower your car payment, including lowering your interest rate and the amount to pay off your car loan, if you meet certain requirements.
  • Stop foreclosure, repossessions, levies, and wage garnishments.
  • Stop family court contempt actions and other consequences of getting behind on your alimony and child support payments.
  • Give you more time to repay the Internal Revenue Service and other tax authorities.
  • Stop creditor harassment and debt-collection lawsuits.
  • Give you a fresh start so that you can recover and rebuild after a financial crisis.
  • Most Chapter 13 plans are five-year plans. There are some debtors (the person who filed the Chapter 13 case) who qualify for a three-year bankruptcy plan. As part of your Chapter 13 plan, you agree not to incur new debt without court approval during your Chapter 13 case.

However, the court understands that debtors may need to apply for a loan while they are in Chapter 13. For that reason, there is a process for incurring new debt during the Chapter 13 case.  

Is Your Chapter 13 Payment Too High?

Chapter 13 bankruptcy is often much more expensive than a Chapter 7 bankruptcy. You have to pay a higher attorney fee, and you also have to pay trustee fees. Sometimes your Chapter 13 plan payment can increase as well, making a Chapter 7 unaffordable.  Many individuals state their  Chapter 13 payment is too high

Even though you are in a Chapter 13 bankruptcy, have you considered checking the costs and durations of all your options? The free calculator below helps you estimate the following:

  1. Debt settlement estimate
  2. Credit Counseling estimate
  3. Chapter 13 Plan Payment Estimate
  4. Chapter 7 Qualification

How Can You get a Personal Loan in a Chapter 13 Bankruptcy?

The process of gaining court approval to incur new debt while in Chapter 13 may vary by jurisdiction. However, most jurisdictions require the debtor to file a Motion to Incur Debt with the bankruptcy court. The motion must be served on the Chapter 13 trustee and all parties in interest, typically everyone entitled to receive general notices in the bankruptcy case.

A Motion to Incur Debt must generally contain:

  • The reason for taking on new debt;
  • The details of the new loan, including the amount of the loan, the interest rate, the term, and the loan payments;
  • The collateral being pledged for the loan, if applicable; and,
  • A letter or statement from the creditor confirming the terms of the loan and approval for the loan contingent upon bankruptcy court approval.

The court schedules a hearing for the motion. At the hearing, the court reviews the reasons why the debtor needs to incur new debt. The Chapter 13 trustee and the court want to ensure that the debtor’s request for obtaining a new loan is valid and reasonable. Also, the court wants to ensure that the debtor has the ability to continue making the Chapter 13 plan payments and paying normal living expenses. If the court approves the motion, the debtor can proceed to take out the loan described in the motion.

Examples of reasons that a court might approve a new loan during Chapter 13 include, purchasing another vehicle because the debtor’s current vehicle is beyond repair, making necessary repairs to a home, or selling a home and buying another home.

Can I get a loan or a credit card for personal needs?

It is very difficult to gain court approval for incurring new debt in a Chapter 13 case. The court is unlikely to grant a request to incur debt, barring a true emergency or special circumstances. Credit cards for personal expenses are definitely not acceptable while you are in a Chapter 13 bankruptcy plan.

As discussed above, if you have a true need, the court might permit you to obtain a new loan. 

The court might allow you to skip two or three Chapter 13 payments if you are struggling because of a short-term financial emergency. This option is usually only available once during a Chapter 13 case. If your income decreases and you expect your income to remain at the lower level, you might be able to modify your Chapter 13 plan to lower the payments. 

Can I get a loan or a credit card for my business?

Incurring business loans and debts during a Chapter 13 case is handled differently than consumer loans and debts. If the debtor in a Chapter 13 bankruptcy is self-employed, it is assumed that the debtor may need to incur business debt in the ordinary course of business.

For example, the business orders supply from a vendor. The vendor bills the client for payment. The business incurred a debt, but it was during the ordinary course of business. For this type of business debt that is paid within a short period, the debtor generally does not need court approval.

However, not all business debt is incurred in the ordinary course of business. If the debtor needs to obtain a loan to replace expensive business equipment, remodel the business location, or purchase a business vehicle, the debtor will likely need court approval before incurring the business debt.

What are some considerations before incurring debt while in Chapter 13?

Before you rush to file a motion to incur debt, explore other options for resolving the problem. For example, can you borrow a relative’s vehicle for a while? Can you make the home repairs yourself instead of applying for a loan? 

Any new debt during a Chapter 13 case can jeopardize your chance of completing the bankruptcy repayment plan successfully. Completing your Chapter 13 plan is required to obtain a bankruptcy discharge. The bankruptcy discharge forgives the remaining amounts owed to unsecured creditors. Without the discharge, you owe the full balance on all accounts.

One way to avoid the need for a loan or a credit card during Chapter 13 is to have an emergency savings account. As soon as you can afford to do so, open a savings account and contribute as much as you can from each paycheck to the savings account. If an emergency arises during your Chapter 13 case, you can use the funds in your emergency savings account instead of applying for additional debt.

Are You Ready to Take Control of Your Debt?

Ascend helps individuals analyze their financial situation and compare various debt-relief options. You can estimate a Chapter 13 plan payment. You can also estimate if you qualify for a Chapter 7 bankruptcy by our bankruptcy means test calculator.