Incurring new debt while in a Chapter 13 Bankruptcy
The day you filed your Chapter 13 bankruptcy, you listed all your debts and provided the court with a plan on how you were going to pay them over the next three to five years, these listed debts are called pre-petition debts. If you incurred any debts after the day you filed bankruptcy, those debts are called post-petition debts. The most common types of debt incurred post-petition are tax debts, a car loan, or medical expenses. Most of the time, post-petition debts are not added to the Chapter 13 plan, and you will be responsible for paying those during or after you complete your Chapter 13 plan. This post will discuss the process of asking the court for approval to incur debt and different ways to deal with post-petition debt.
A lot can happen in the three to five years of a Chapter 13 plan and you might be faced with a situation where you need to take on new debt. If you need to take on new debt, you will need to ask the court for permission. You may then pay the debt outside the bankruptcy case or may be able to include the debt in your Chapter 13 plan payment. Your bankruptcy lawyer will work with you to amend your plan and ask the court for permission to incur new debt.
Post-Petition Tax Obligations
Under 11 USC 1305, a governmental unit (e.x. IRS, KDOR), may file a claim for the amount you owe and get priority treatment. The amount you owe will be put into your Chapter 13 plan and be paid out during the case. You may have to increase your plan payments to make this work.
Motion to incur indebtedness and court approval.
You are allowed to incur debt that is for property or services “necessary for the debtor’s performance under the plan”. You arguably need a vehicle to get to and from work or you will be unable to make your plan payments. Student loans are generally an approved debt as are reasonable home or car repairs. Certain debts do not require court approval. Debts that are incurred as a result of regular and basic living do not require prior approval and debts from emergencies such as medical emergencies are addressed after they are incurred.
Example of incurring debt for a car purchase
Your attorney will file a motion to incur indebtedness with the court. The motion will outline the reason why you need a new vehicle. Say your car is always breaking down and you can’t afford to keep fixing it and need a new one. It will also list the basic loan terms such as the car make and model, the sales price, monthly payment amount, and length of the note. This gives the trustee an idea if you can afford the payment and if it is fair for your creditors to take the loan payment. Many times, the motion will be approved, and you will not have to attend a hearing.
Once you are approved for the loan, you can provide a copy of the court order granting you permission to purchase the car to the lender to finalize the deal. Many lenders that work with people in bankruptcy are familiar with this and will expect a court order approving the transaction.
Paying for the new debt
You will submit a new budget to show either your new expense if you are paying the debt outside the case or the change in your plan payments if you pay the new debt through the plan.
Pay the debt outside the case
Most of the time, post-petition debts are not put into the case and you will be responsible for paying them after bankruptcy. For example, if you incurred a $1000 medical bill during your chapter 13, the hospital will want to be paid when your plan is over. They will not be able to sue or garnish wages while you are in bankruptcy unless the hospital requests the ‘automatic stay’ be lifted. If the post-petition debt was for a car, the car lender may specify that they want to be paid outside the plan.
Including debts in Chapter 13 Plan
The other option is to include the debt to be paid through your plan. To include the debt in the plan, the trustee must consent to the inclusion of the debt. This is usually done with the motion to incur indebtedness. Sometimes it is not possible to obtain trustee consent before incurring debt and the court will consider the circumstances before it allows you to put the debt into the plan. The creditor will also need to consent to be paid through the plan and will file a proof of claim for the amount you owe.
A creditor may not always agree to be paid through the plan. If you only offer to pay the creditor a fraction of what it owed and discharge the rest they can wait until after the bankruptcy is over to start collecting.
What If I do not get court approval to incur debt?
During Chapter 13, you are not permitted to borrow money unless you have permission from the court. All of your income belongs to the bankruptcy estate and is used to pay your existing creditors. If you attempt to pay for post-petition debt without court permission, the trustee could object to your plan stating that all of your disposable income is not being used to fund the plan and ask the court to dismiss your bankruptcy case.
You may still try to get court approval for debt after the fact. You will need to show the court it was not possible to get approval ahead of time. The most common example is for medical bills after an accident.
Sometimes post-petition debts are very high, and you may not be able to afford to pay it after your Chapter 13. For example, you incurred $20,000 in medical debt during your Chapter 13. There are two extreme solutions to this issue if amending your plan doesn’t cut it.
Convert to Chapter 7
You may be able to convert your Chapter 13 bankruptcy to a Chapter 7. The Chapter 7 case will include any debts you incurred since you filed your Chapter 13. The new post-petition debts will now be dischargeable in Chapter 7.
Dismiss your Chapter 13 and refile.
You could dismiss your current Chapter 13 case and file a new Chapter 13. The “new” Chapter 13 would include new debts since filing the first case. Usually, there are no problems dismissing a case under these circumstances. You may be able to refile immediately, or the court may set a 180-day bar date and you will have to wait 6 months to re-file another Chapter 13.
If you need to get a loan while in Chapter 13 bankruptcy, contact your bankruptcy attorney. The lawyer can advise you on how to get court approval and how the new debt will affect your plan payments.
If you have any bankruptcy questions please call our office and one of our attorneys will be happy to go over them. We have bankruptcy offices in Wichita, Topeka, Lawrence, and Overland Park.