When you file for a chapter 13 bankruptcy, the idea is to stick to the payment plan and get yourself out of debt. It’s a valuable form of financial relief because it provides an opportunity to manage the debt in a way that allows you to keep your assets. Under these circumstances, adding new debt is far from ideal, but a situation where it may be necessary could arise.
In general, you are not allowed to take on new credit or loans during a chapter 13 bankruptcy. However, the process of completing payments on one of these plans can take years and the court does understand that in that length of time, it is possible for circumstances to cause a genuine need for credit, so there are some exceptions that will make it possible for the individual incur new debt.
Preapproval for New Debt
For the most part, you are going to need pre-approval for any new debt. The approval is going to need to come from the court or trustee and they only going to give approval for special circumstances. In reviewing the need for the petitioner to take on new debt, the court or trustee will consider the need for the debt and how it will impact the individual’s ability to maintain their obligations relating to the chapter 13 agreement.
A good example of a debt that they are likely to authorize is one that is for the purpose of replacing a vehicle. If you need the vehicle to maintain your employment and you need your job to uphold your end of the chapter 13 bankruptcy, then it is going to be seen as in the best interest of all parties to allow you to take on the debt. However, if you are trying to replace your old sensible car with a new and expensive sports car, then they are likely to reject the request and advise to come back with a plan to buy a new car that is a little more reasonable under the circumstances.
The only exception to the need for pre-approval is when you experience a genuine emergency where there was no chance to get approval or the circumstances demand immediate action. Even in this situation, you need to inform the trustee as soon as possible. If it is at all possible, you want to avoid taking debt without first informing the trustee because it could have serious implications for the status of your chapter 13 petition, but the exception is there for true emergencies.
A good example of an emergency would be a sudden medical problem the resulted in the need to go to the hospital. If you are in a car accident and there is the need for medical treatment, there is little that can be done to avoid incurring new debt and you obviously won’t have the time to go through the proper procedure to get authorization.
Following the Rules
A failure to follow the proper procedure for getting approval or taking on unnecessary debt could result in some serious problems. It could be viewed as an unwillingness to comply with the agreement and your case could be dismissed. If your case is not dismissed, the court could refuse to include the new debt and this could make it very difficult to make all of the payments included in the chapter 13 and repay the new debt that was acquired.
If it is at all possible, a person that is subject to a chapter 13 bankruptcy should avoid taking on any new credit or loans. That being said, life sometimes has a way of not sticking to the plans that we set. If you are working your way through a chapter 13 and it appears that you may need to take on some new debt, the court will be willing to work with you if the need for a loan or credit appears necessary or in the best interest of the agreement.