Credit During Bankruptcy
There are many situations when a person needs credit during an open bankruptcy case. Refinancing a home mortgage, redeeming an automobile, or simply applying for a new credit card are circumstances when a debtor needs to obtain credit during bankruptcy. Fortunately, the bankruptcy process allows the debtor to obtain the credit he or she needs while concurrently pursuing a bankruptcy discharge.
When a debtor applies for credit during an open bankruptcy case, the application not only affects the debtor and the creditor, but also concerns the trustee and the bankruptcy court judge. The creditor is concerned that the bankruptcy will interfere with the extension of credit, and the bankruptcy trustee and judge are concerned how the extension of credit will affect the bankruptcy case.
For Chapter 7 cases, the reach of the bankruptcy court is limited to those assets that you owned and debts that you owed on the date that you filed bankruptcy. The judge does not have jurisdiction on post-petition matters. While the bankruptcy court does have jurisdiction to approve or reject a reaffirmation agreement for a pre-petition debt, the court cannot forbid a post- petition extension of credit.
For Chapter 13 cases, the court has continuing jurisdiction over your finances during the bankruptcy case. A Chapter 13 debtor is required to commit all of his or her disposable income to repay creditors. Any new credit must be approved by the bankruptcy judge since a new payment obligation may impact the Chapter 13 repayment plan.
Automobile credit is often a concern for bankruptcy debtors. Obtaining a vehicle during Chapter 13 bankruptcy will generally require that the debtor show that the vehicle purchase is “necessary to the completion of the Chapter 13 bankruptcy plan.” In plain language, you need the car to get to work to make the money to pay the creditors in the plan. When a vehicle purchase is reasonable and necessary, the courts are generally willing to approve the purchase on credit.
If you have filed or are considering filing bankruptcy and are in need of credit, speak with an experienced bankruptcy attorney and discuss your situation. Your attorney can offer advice and recommendations for obtaining both a bankruptcy discharge and the credit you need.
Discharging Post-Petition Debt in Chapter 13
A lot can happen during a Chapter 13 repayment plan which generally lasts three to five years. Sometimes large debts are incurred that the debtor is unable to pay. Fortunately, a Chapter 13 debtor is able to discharge a post-petition debt, but only after certain prerequisites are met.
First, the debtor must amend the repayment plan to provide for a post-petition debt. Second, the debtor must usually obtain the approval of the bankruptcy trustee prior to incurring the debt. This is not always obtainable, especially in the case of a large medical bill. Third, the creditor must voluntarily choose to file a proof of claim. And finally, the claim must either be a tax claim, or a claim for a consumer debt necessary for the completion of the debtor’s plan.
A common situation in which post-petition debts arise in a Chapter 13 case is where the debtor needs to purchase a different automobile. Repaying a post-petition car loan through a Chapter 13 plan is easily accomplished through coordination and cooperation from the trustee, the lender, and the court. The lender agrees to be paid by the trustee, the trustee agrees to sanction the debt, and the court approves the amended plan allowing the lender to be paid through the bankruptcy plan.
In some cases it may not be practical to include a post-petition debt in the debtor’s Chapter 13 plan. In that case, the debtor may elect to convert the Chapter 13 case to one under Chapter 7. The Bankruptcy Code states that a debt that arises after the Chapter 13 filing date, but before the debtor’s conversion to Chapter 7, is to be treated as a pre-petition debt. The Chapter 13 restrictions and requirements listed in the preceding paragraph do not apply to debts in a conversion case.
The Bankruptcy Code contains many flexible options for reorganizing your finances and dealing with your creditors. Even when there is an unexpected event that results in a debt, your bankruptcy attorney can provide you with choices for dealing with a post-petition debt.