Chapter 13 bankruptcy was designed to provide relief for wage earners having difficulty repaying debts. So taking on yet another loan during a Chapter 13 case may seem counterproductive. Nevertheless, certain situations can arise that justify additional financing. In most cases, the debtor must first obtain permission from the bankruptcy judge or the Chapter 13 trustee. A new loan has the greatest chance of receiving judicial or trustee approval if it reasonably enhances the debtor’s ability to continue making payments under the Chapter 13 plan.

If you are in Chapter 13, permission is generally needed for these loan transactions, among others:

• New credit card accounts
• Signing a note or loan agreement, even as a co-signor or guarantor
• Car leases and financed purchases
• Second mortgages and home equity loans
• “Rent to own” contracts for home furnishings or appliances
• Student loans, whether for the debtor or family members
• Pledging property as collateral for a debt
• Borrowing against retirement accounts

If you enter any of these transactions without permission, the loan may be invalidated and any property purchased or other value received may have to be returned. Furthermore, your Chapter 13 case may be dismissed and you may have a hard time obtaining future bankruptcy relief.

In the course of a three- or five-year Chapter 13 plan, numerous situations might arise for which permission to take on new debt could be granted. For example, if your car breaks down and it would cost more to repair it than to replace it, financing the purchase may be the best option, even though the interest rate will likely be high. If you or a family undergoes medical treatment and later receives a bill, that is a debt that could be approved. A tax bill from the IRS or the state treasury that you are allowed to pay off over time is likewise a debt that the trustee or court could permit you to take on.

Obtaining trustee or court approval means demonstrating you can assume the added debt and continue making your monthly Chapter 13 plan payments. Your chances of approval are improved if you can show the new loan proceeds will help you adhere to the plan. For example, you need a car to get to work and maintain a stable income. Maintaining your health through proper medical care is also important to staying employed. Keeping up with tax payments prevents assessment of interest and penalties.

An experienced Chapter 13 bankruptcy attorney can analyze your income, existing debts and repayment plan in order to present a compelling argument for granting permission for the loan you need.

The Law Offices of James C. Zimmermann represents clients in Chapter 13 and other bankruptcy and debt relief matters throughout New Jersey’s Sussex and Passaic counties. Call us at 973-764-1633 or contact us online to arrange a free initial consultation.