Chapter 13 bankruptcy can help you reorganize your debt into one structured payment plan. It is designed for people who simply can't keep up with their debt anymore. A Chapter 13 repayment plan can:
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.
Chapter 13 bankruptcy is usually 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. A lot of people feel like their Chapter 13 Payment is overwhelming.
Even if you're already in a Chapter 13 repayment plan, it's worth reviewing all of your options. The free calculator below helps you estimate the following:
The process for getting court approval to take on new debt can vary depending on where you live and the specifics of your case. However, most jurisdictions require the debtor to file a Motion to Incur Debt with the bankruptcy court. The motion has to be sent to the trustee and other parties involved in your case.
A Motion to Incur Debt must generally contain:
In most cases, the court will set a hearing. At the hearing, the court reviews the reasons why the debtor needs to incur new debt. The trustee and the judge want to make sure that the debtor’s request for obtaining a new loan is reasonable and necessary. 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.
Courts are more likely to approve requests like:
Getting approval for new personal debt during a Chapter 13 isn't easy. The court is unlikely to grant a request to incur debt, barring a true emergency or special circumstances. Opening new credit cards for personal spending is almost always a no go.
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. In many cases, courts only allow this once. 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.
Business debt is often treated differently than personal debt in a Chapter 13. If you're self employed, the court understands that you may need to take on normal business expenses.
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.
Before filing a motion, ask yourself if there's another way to solve the issue. 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?
While sometimes unavoidable, taking on new debt can put your entire Chapter 13 plan at risk. In order to recieve a discharge you have to complete your plan. The bankruptcy discharge forgives the remaining amounts owed to unsecured creditors. Without the discharge, you owe the full balance on all accounts.
One of the smartest things you can do in Chapter 13 is build a small emergency fund. 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.
If you're unsure what your best move is, we can help you compare your 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.
