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Can I get new credit during Chapter 13?

Erica Sandberg

January 22, 2014

QDear Erica,

Can you get credit while you are in active Chapter 13 bankruptcy?

AHi Beverly,

In most cases you are prohibited from entering into new credit contracts while you are working down your old debts with a Chapter 13 bankruptcy. Yet, as with most rules, there are exceptions.

Before I explain how you might be able to open new accounts, let's go over the purpose of the Chapter 13 process. I'm quite sure it will help illuminate why borrowing more money, whether in the form of a loan or credit card, is frowned upon while you're using a Chapter 13.Ask Erica

Surely the reason you're using this form of legal protection is because you were having a hard time managing your debts. Maybe you couldn't meet your credit card payments and your creditors were threatening to sue you. Or maybe they had already taken legal action, prompting wage garnishment or some other post-judgment collection action.

Perhaps you had tax debt, a tardy student or vehicle loan, or a defaulted mortgage. All these you could have included in a Chapter 13 bankruptcy, thus gaining the benefit of fixed, affordable payments, and suspended penalties and finance fees — as well as the ability to stay in your home or keep your car. If you included unsecured accounts, you may even walk away from some of those obligations at the end of the three-to-five year restructuring period.

To qualify for such a bankruptcy, you have to earn enough to make the one satisfactory payment every month until it's over. Trustees are appointed to receive that cash from you and then distribute it to the creditors in the right percentage and order. That's where it gets sticky. You see, their job is not to get you the best deal, but to make sure those you owe get the most out of you.

While the Chapter 13 is in effect, you make a couple of serious promises. One is to pay extra when you can. That means that if your expenses decrease or your income rises, your creditors should receive extra cash. The other is to not enter into any fresh debt obligations, because your payments to them will jeopardize the one you're already making through the court.

So how can you get around that agreement? You'd have to clearly demonstrate that you have special circumstances and can't live without a loan or line of credit. Not only is that pretty hard to prove, but your trustees won't be advocating for you to make that happen. You'll need their permission, and if you attempt to do it behind their backs, your bankruptcy could be dismissed. Then all that bad stuff that was about to happen or had already started would spring into action.

If you want to try, contact your trustee and explain yourself. If you can show that you have a genuine emergency that can only be cured by borrowing funds, your request may be approved. For example, say your house has flooded and insurance isn't covering the damages. You have no savings with which to pay the repairs, and without them your home will be inhabitable due to toxic mold. Another could be that your only mode of transportation broke down and you need a loan to by another car so you can continue to work — and thus maintain your Chapter 13 payments. In such extenuating situations, the court could have mercy. They may even modify the payments you're making now so you can stick with the bankruptcy to the end.

But getting the all-clear signal for a piece of plastic just so you can charge items like clothes, trips and meals? That would be highly unlikely.

Got a question for Erica? Send her an email.