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Rebuilding Credit During Chapter 13 Bankruptcy Proceedings
Are you in the process of a Chapter 13 bankruptcy, but eager to start rebuilding your credit? Maybe you have been considering paying off your Chapter 13 plan early. Or maybe you have been thinking about refinancing your vehicle loan. Or maybe you are considering getting a new credit card to start establishing a new, better credit history. Here are answers to some questions related to paying off debts or obtaining new credit that can arise during the course of a Chapter 13 bankruptcy plan:
What if I want to pay off my Chapter 13 plan sooner?
Often, life circumstances will change resulting in a debtor receiving more money. Be it inheritance, promotion at work, or even lottery winnings, debtors often want to know if they can increase their payments or make a lump sum payment in order to pay it off early. While it is often possible to do so, it is inadvisable if the debtor’s Chapter 13 plan is to pay for less than 100% of the debt they owe, and therefore involves debt discharged at the end of the plan. By paying extra or by paying early, the debtor sends a signal to the Chapter 13 trustee that they have more money to pay the creditors than what was originally negotiated in the Chapter 13 plan, and the trustee can pursue more or all of the amount actually owed to the creditors.
The debtor’s options are generally limited to either continuing to make payments according to the plan and preserve the opportunity for the remaining debt to be discharged, or they can make a lump sum payment of 100% of all debts owed. In general, debtors have an obligation to report upswings in income to the Chapter 13 trustee, which may affect the plan payments.
My monthly payment to my auto loan is too high, can I refinance while I am going through Chapter 13 bankruptcy?
For a debtor to either refinance their current vehicle, or to finance a necessary new vehicle, the lender will likely want a letter authorization from the trustee. The debtor’s attorney will provide the terms of the financing to the trustee, who in turn will normally draft the authorization, so long as the terms are reasonable. As for incurring new debt during the bankruptcy process, the chapter 13 trustee usually takes the position that court approval is required. While that position is not explicitly supported by the Bankruptcy Code, if the new debt can be demonstrated to impact a debtor’s ability to meet plan payments, or the debt is a significant amount (such as for a home or vehicle) court approval should be sought. If creditors have been found to be severely affected by the new debt you have taken on, the court might dismiss your case and even bar you from refiling for an amount of time.
If the debtor can demonstrate that the debt is necessary, however, the debt can be approved. Even during their plan, debtors have been approved for credit cards, vehicle loans, and even residential mortgage loans, depending on their circumstances when they apply to the trustee. A qualified bankruptcy attorney can help you navigate the process.
Can I take on a new credit card while in Chapter 13?
For a small limit credit card, court approval may not be required in a Chapter 13 case, depending largely on local rules. Some local rules may specify a capped dollar amount, such as $1,000, that you are permitted to take on in non-emergency consumer debt without applying to the trustee or court.
In the District of New Jersey, Local Rule 4001-3(b) requires a motion to be made to obtain credit. The motion must include:
- A description of the efforts to obtain credit;
- Facts demonstrating that the debtor obtained the best available terms for the proposed credit;
- A detailed budget supporting the proposed credit;
- Facts demonstrating the extension of credit is made in good faith.
Additionally, this motion requires the debtor to summarize any provisions of the new credit agreement, including the amount of credit sought, conditions to closing, pricing and economic terms, and repayment of the credit in connection to the plan. One important note: this debt is not dischargeable with the pre-petition debts in a debtor’s bankruptcy. This means that this debt will not be discharged at the end of the case, and will need to be paid back in full, even if the terms are unfavorable.
Generally, a Chapter 13 bankruptcy filing will remain on your credit for seven years, including the time it takes for your repayment plan.
The best thing a debtor can do for their credit is make the Plan payments in a timely manner. Your credit score will increase because you will be demonstrating that you can consistently make payments, and because those payments will decrease your total outstanding debt. Other actions a debtor can perform are becoming an authorized cosigner, keeping up with current credit card payments, and reduce the amount of credit the debtor is using.
In addition to small limit, secured credit cards discussed above, if you have trouble obtaining such cards, you can take out small credit-builder loans, then pay them off. These loans are forms of secured debt which require you to use collateral. Paying these off will increase your credit score, which, after a while, will allow you to take out new lines of credit such as credit cards.
A bankruptcy lawyer in your state can discuss your Chapter 13 Plan and credit-building strategies going forward. The attorneys at Scura, Wigfield, Heyer, Stevens & Cammarota LLP can help. Please call our offices to schedule a free consultation and hear your options.
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