Since most Chapter 13 cases last for 5 years, issues can come up that require that they incur debt. The bankruptcy code is equiped to handle these life issues but as with anything involving the court.
The Bankruptcy Code permits you to incur some kinds of new debt, but you will need to get the court’s permission in many cases. The following explains what kind of debt you may need and how to get it. You can learn more about Chapter 13 and the repayment plan in Chapter 13 Bankruptcy Plan.
Credit You Might Need During Chapter 13
The court might allow you to obtain new credit while you’re in a Chapter 13 plan. Here are some of the types of situations that arise and might cause you to need credit during your plan:
- A new car. Cars don’t last forever. If yours breaks down, you might need to finance a new one. Getting a loan from a conventional lender is difficult, but there are lenders who specialize in lending to people making Chapter 13 payments. Be prepared to pay a high rate of interest, however.
- Home. You may need to purchase a home for your family.
Getting New Credit in Chapter 13
The court will permit you to incur new debt for personal, family, or household purposes if it is necessary for you to continue to make payments under your plan. Put another way, if you can demonstrate to the Chapter 13 trustee and the court that you need the credit so you can stay in the plan then the court is likely to allow you to incur it. For example, if you need a reliable car to get to work so you can earn money to make payments to the Chapter 13 plan, the trustee and court are likely to approve the car loan.
In most cases, you need to obtain the court’s permission before you incur substantial debts.
How to Get Permission to Incur Debt to Purchase a Car
The procedures you must follow to ask the trustee and court for permission to incur new debt vary, so check with your Chapter 13 trustee or attorney to find out the specific procedures required in your bankruptcy court. Below we’ve outlined a typical process for getting a new car loan.
- Get a Buyer’s Order from a Dealership: The first step is finding a dealership who are willing to finance an open bankruptcy loan. The dealer will draw up a buyer’s order with the details of the loan for the borrower to take to their attorney for a motion to be filed. This should include the highest interest rate possible and “or similar” next to the vehicle choice – otherwise, the process can be ruled invalid if the actual loan doesn’t match what’s on the buyer’s order.
- Your Bankruptcy Attorney will file a Motion with the Court: Next, the borrower brings the buyer’s order to their attorney along with their reasons for needing a car. A “Motion to Incur Debt” will be filed with the court, which includes a proposed adjusted repayment plan that factors in the auto loan. The client will also need to show that they can afford this extra strain on their budget.
- The Court Makes a Decision: The creditors and other parties involved in the repayment plan also receive the motion and are given a chance to object. There may be a hearing the borrower has to attend to justify the loan. If the court approves the motion, they issue an “Order to Incur Debt”.
The borrower can then take the court order – the necessary authorization from the court – back to the same dealership to complete the purchase.
Keep in mind that the process could take up to a month or more, so try to plan ahead.
How to Get Permission to Incur Debt to Purchase a Home
- Provide your attorney with a copy of the Purchase and Sale Agreement, proposed HUD statement, and Loan Agreement with the Lender: The first step is finding a mortgage company that will finance your loan while in an open bankruptcy loan. Once the terms of the loans have been determined you will need to provide your attorney a copy of the loan agreement. You need to make sure that your real estate agent knows you are in a bankruptcy because the purchase and sale agreement needs to have language that the agreement is contigent on the approval of the bankruptcy court. Your agent also needs to set closing AT LEAST 45-60 days out to allow this process to be completed. Your attorney will need a copy of the purchase and sale agreement and the proposed HUD statement to show who is getting paid what at closing.
- Your Bankruptcy Attorney will file a Motion with the Court: A “Motion to Incur Debt” will be filed with the court and a hearing scheduled. The client will also need to show that they can afford this extra strain on their budget.
- The Court Makes a Decision: The creditors and other parties involved in the repayment plan also receive the motion and are given a chance to object. There may be a hearing the borrower has to attend to justify the loan. If the court approves the motion, they issue an “Order to Incur Debt” and the loan can close.
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