How To Get A Loan in A Chapter 13 Bankruptcy

Learn more about collateral loans while in a Chapter 13
Information in this article does constitute legal advice, is for informational purposes only and may not constitute the most up-to-date information. Readers should contact their attorney for advice to any particular legal matter.

A Chapter 13 bankruptcy provides a solution for individuals struggling to repay their debts through a reconstitution process. The Code governing debt adjustment and insolvency offers this legal remedy to help people recover financially.

You can benefit in the following ways from Chapter 13:

  • Minimize payments to unsecured lenders, such as bank card debt and medical expenses.
  • Prevent foreclosure, reclamations, and taxes.
  • Avoid family court penalties and other repercussions of falling behind on alimony and upkeep payments.
  • Get more time to repay the IRS and other credit authorities.
  • Protect yourself from creditor provocation and indictments.
  • Begin a new start and recover from financial difficulties.

Typically, Chapter 13 plans last five years, although some debtors may be eligible for a three-year payment plan. You must consent not to obtain a debt without court compliance during this time. 

With the help of a Chapter 13 repayment plan, you can take control of your financial situation and start the path toward a more stable future.

The court acknowledges that defaulters may require additional loans in the Chapter 13 bankruptcy case. For this logic, there is a set process for obtaining new debt during the Chapter 13 proceedings.

Is the Amount of Your Chapter 13 Payment Excessive?

Chapter 13 bankruptcy can be significantly more costly than Chapter 7 bankruptcy. This is due to several factors, including trustee fees, higher attorney fees, and potentially a higher Chapter 13 payment plan. 

For some individuals, these added costs make Chapter 13 less affordable, even if they initially preferred it over Chapter 7. 

If you are currently in Chapter 13 bankruptcy, it's still a good idea to explore your options and compare the expenditure and time frames involved. 

What is the Process for Obtaining a Collateral Loan During Chapter 13 Bankruptcy?

You must obtain court consent to obtain new debt. The process for gaining this approval may vary depending on the jurisdiction in which the case is filed.

However, it generally involves the debtor filing a Motion to obtain Debt with the bankruptcy tribunal. This motion must be served on Chapter 13 custodial and all parties in the case. 

When applying to obtain new debt in Chapter 13 bankruptcy, a Motion to Incur Debt should typically be filed with the court and include the following information:

  • The terms and details of the loan
  • The guarantee being pledged
  • Information about the purpose of taking on a new debt
  • A confirmation from the creditor. It contains information that helps the court understand the reasoning and specifics of the new loan.

The court has set a date for a hearing to consider a motion. The purpose of the hearing is for the court to evaluate the debtor's justification for taking on additional debt. The Chapter 13 custodian and the tribunal aim to verify that the request for a new loan is feasible and justified.

Additionally, they want to make sure that the defaulter has the means to continue fulfilling their Chapter 13 payment plans and their daily living expenses. Upon approval of the motion by the court, the debtor is authorized to proceed with obtaining the loan during the indictment.

A court may authorize a new loan during Chapter 13 for various reasons, such as buying a new car, as the current one is irreparable. The reasons must be valid and reasonable, and the debtor must be able to continue paying their Chapter 13 plan and everyday living expenses.

Is It Possible to Acquire a Collateral Loan?

It is hard to acquire court permission to incur new debt in a Chapter 13 case. The Chapter 13 tribunal unlikely allows a debtor to incur debt, except in an emergency. Bank cards for non-cash expenses are impermissible while enrolled in a Chapter 13 bankruptcy plan.

As stated above, the court might allow you to obtain a new loan if you have a real emergency. 

The court authorizes you to make some Chapter 13 payments if you are struggling because of a resolvable financial crisis. This alternative is only available once during a Chapter 13 bankruptcy case. If your income goes down and you expect your income to remain at the lower level, you are within your rights to amend your bankruptcy plan to lower the payments. 

Is it Possible to Secure a Loan for Business Purposes?

The process of obtaining business loans and debts during a Chapter 13 bankruptcy is distinct from retail credit. For self-employed individuals in a Chapter 13 bankruptcy, it is anticipated that they may require business debt as a regular part of conducting their business operations.

For instance, when a business purchases supply from a vendor and is invoiced for payment, the debt incurred is a normal part of the business. In such cases, court consent is not required as long as the debt is paid within a short time frame.

It is important to note that the specific circumstances and requirements for incurring business debt during a Chapter 13 bankruptcy can vary. 

In cases where the lender needs a loan to purchase costly business equipment, renovate the business location, or buy a business car, court consent is usually required before obtaining the debt.

What Factors Should You Consider Before Taking on Debt During a Chapter 13 Bankruptcy?

Before filing a motion to incur debt, it is essential to consider alternative solutions to resolve the issue. For instance, you may temporarily consider borrowing a vehicle from a relative rather than seeking a loan.

Incurring new debt during a Chapter 13 bankruptcy case can negatively impact your ability to complete the bankruptcy repayment plan. 

Completing the Chapter 13 plan is necessary to receive a bankruptcy discharge, which will forgive any outstanding balances owed to unsecured lenders. You will still be responsible for paying the total amount owed on all accounts without a discharge.

Therefore, it is crucial to weigh all the options and carefully consider the potential impact of incurring new debt on your Chapter 13 bankruptcy case before proceeding. 

An effective way to avoid a loan required during Chapter 13 is establishing an emergency savings account. You will start building up a savings account and make regular contributions from your paychecks once you're financially stable.

Are You Prepared to Manage Your Debt Effectively?

We offer a comprehensive financial analysis solution for individuals looking to manage their debt. With our advanced tools, you can quickly evaluate and compare different debt settlement options to find the best fit for your unique circumstances.

The platform’s Chapter 13 payment plan estimator gives you an accurate prediction of your monthly payment. 

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