Technically, a debtor in bankruptcy should not incur new debt unless the court approves it. It is quite difficult for the courts to grant approval for new debt unless an emergency forces you to incur debt to save a life, preserve health, or retain the property. So, what do you do if you need a loan for reasons other than the allowed exceptions? For example, what next when you want a loan to buy a new home, a car, or co-sign your children's college student loans? Here is a complete guide on how you can get authorization from the bankruptcy court to incur debt.
What Debts Need a Court Approval in Chapter 13 Bankruptcy?
Most financial emergencies can barely wait for you to seek court approval to incur debt to deal with the emergency. However, incurring debt while in bankruptcy without seeking the bankruptcy court's approval can have dire consequences.
Incurring debt without the court's approval might result in the Chapter 13 trustee filing a petition to have the court dismiss your case. This will happen if the new debt tampers with your Chapter 13 payment plan, making it infeasible. Your plan will be considered infeasible when the trustee believes you have incurred a debt that will interfere with your ability to continue making Chapter 13 payments according to the plan. Here is a list of debts that will need the court to authorize in Chapter 13:
● Debt to lease a car, furniture, etc.
● A car loan to buy another car
● Co-signing a loan
● A payday loan or salary advance
● Credit card debt
● Debt to buy anything on credit
● A loan to enter a rent-to-own agreement
● Student loan for yourself, a child, or someone else
● A loan against your retirement savings account
● Debt that requires you to use the property as collateral
Discussing your financial needs with your Chapter 13 lawyer, especially when considering taking out a loan, is important. Some debtors might also need to have a credit card for employment purposes. Note that acquiring a credit card, not in your name but one your employer pays for, will still need court approval.
Step-by-Step Guide on Petitioning the Bankruptcy Court to Authorize New Debt While in Chapter 13
If you really need to incur new debt, have consulted your attorney and decided it is the best thing to do, you can go ahead and petition the court to authorize new debt. Here is a step-by-step guide:
1. Prepare a petition
You should prepare a petition requesting the bankruptcy court to authorize you to incur debt. Gather supporting documents like your current payment and interest rate schedule in chapter 13. Clearly explain why you need the debt, how much the debt will be, the interest rate, the terms of the loan, and how much you will pay towards the debt every month.
2. File the petition and serve all interested parties
Once you have gathered all the necessary supporting documents, file your petition, and serve a copy to the trustee, creditors, and other relevant parties to the case.
3. Prepare Amended Schedule J and file it
Schedule J is your expense list. When taking on a new debt, you must prepare and file an amended Schedule J. Show your current expenses and then show the schedule after incurring the new debt.
Note: When your income changes while under Chapter 13 bankruptcy, you will be required to file an amended Schedule I. Sometimes, the court might need you to occasionally file an amended schedule I, whether your income changes or not. You might need to also file an updated pay stub 60 days before filing the petition requesting to incur additional debt.
4. Wait for the court to schedule a hearing
Once you file your petition, wait for the court to schedule a hearing. Your creditors, the Chapter 13 trustee, and other relevant parties can object to your petition. Should any party object to the hearing, the court will schedule a hearing to hear their reasons and arguments against the motion.
How the court handles the hearing will depend on your state. In some jurisdictions, the motion will be in the passive motion list. In this case, the court will only hold a hearing if the trustee, creditor, or any other party objects to the motion.
The court will approve your motion if you provide a good reason to incur debt and prove that incurring additional debt will not affect your Chapter 13 payment plan. You increase the chances of your motion getting approved if you work with a chapter 13 bankruptcy attorney who will file the petition and argue on your behalf. With years of experience, an attorney can accurately file the petition, gather the required documents, and present a persuasive argument proving the new debt will not interfere with your payment plan.
Incurring Debt to Purchase an Asset Chapter 13 Bankruptcy
Most debtors in Chapter 13 file a petition to incur new debt to afford to buy a home or a car. Since a chapter 13 payment plan takes considerably longer to complete, sometimes the debtor might need a car, e.g., to commute to work easily or when the family grows. Whatever the reason, it is important to consult a Chapter 13 bankruptcy attorney before signing any forms to take a loan or buy an asset. Your attorney will advise you accordingly. They will also provide a list of documents you must have before filing the authorization to incur debt with the court.
Additionally, your lawyer will analyze your current payment plan and advise you depending on the specifics of the new debt. They can predetermine the maximum debt the bankruptcy court may be likely to approve and how much the interest rate, monthly payment, and equity of the new asset will be. The court will likely reject your request if the new loan exceeds the parameters.
What to do When the Court Does not Approve Your Request to Incur Debt in Chapter 13?
If the court fails to approve your request to incur new debt, consult your lawyer about possible reasons for the rejection and the next best option. Your lawyer might advise you to convert your bankruptcy to Chapter 7. While converting means you will no longer need to make more payments toward your creditors, your assets will be at risk of liquidation.
Besides, it is not always possible to convert Chapter 13 into Chapter 7 bankruptcy. You will need to meet the income requirements in the Chapter 7 Means test to qualify to file. It might not be the best option, especially if you have assets that will be liquidated once to convert to get rid of your debt. Therefore, it is important to consult an attorney and determine the next best cause of action.
Alternatively, you can opt for a Chapter 13 dismissal and refile Chapter 13 bankruptcy. This is a move you should only make with the help of an experienced Chapter 13 bankruptcy attorney. You cannot just refile for Chapter 13 bankruptcy immediately; you might need to wait a while before refilling. If you incurred debt right before filing for Chapter 13 bankruptcy, had issues with the automatic stay, or had problems with your income, you might not be able to refile.
Do You Know There are Other Ways to Solve Your Debt Problems?
There are other non-bankruptcy options to help solve your debt problems. We can help you explore these options. Get in touch with us today for a free case evaluation. Our team of knowledgeable, friendly, and competitive members will work with you, assess your situation and offer personalized advice on the best way to solve your debt problem.