Incurring New Debt in Bankruptcy

BankruptcyFor the most part, Chapter 13 bankruptcy doesn’t have to affect the filer’s life very much, apart from having to make payments each month to a trustee.  However, there is one limitation on Chapter 13 debtors.  They cannot incur new debt without permission from the Chapter 13 Trustee or the court.  The reason for this limitation is that at the time a  Chapter 13 plan is confirmed by the court, the debtor has to prove that the plan is feasible.  Feasibility means that the debtor can afford to make the payments as proposed in the plan.  Any changes to the debtor’s budget that may affect his ability to continue making payments in the bankruptcy case must be approved.

It may seem that getting permission to incur new debt is a burden but in practice it is usually just a formality, depending on what the debtor wishes to finance.  Trustees are generally quick to permit debtors to incur debt to purchase a new vehicle if the vehicle is needed and the terms are reasonable.  Many Chapter 13 trustees have limits on how much can be financed and a maximum monthly payment.  For example. one Chapter 13 Trustee in Texas has an $18,000 financing limitation and a maximum payment of $400 a month.  Similarly, trustees will usually not oppose the purchase of a home or a loan modification as long as the terms of the note are reasonable and not exorbitant.

In general, trustees will not allow debtors to incur credit card debt without a very good reason.  Debtors who are in business and need trade credit in order to conduct business may be able to use credit cards in business, but most filers cannot.  The usual procedure for incurring new debt in Chapter 13 cases is to send an informal request to the trustee.  The reason for borrowing the money and the amount being financed should be sent with the request.  If the trustee denies the request then the debtor can file a motion with the court asking permission to borrow the money and let the judge decide the issue.