Bankruptcy is a process designed to allow a debtor to obtain a fresh start through discharge of certain debts. When a debtor files for bankruptcy, they’re granted the protection of the automatic stay. This protects the debtor and the bankruptcy estate from pre-petition creditors continuing to pursue debt collections.
However, what happens when a debtor’s vehicle is damaged beyond repair after they file for bankruptcy, and they need to purchase a new one? Can a debtor purchase a house by taking out a mortgage after bankruptcy? These are common questions and the answer, as always with attorneys, is “it depends.” Debtors do have the ability to obtain post-petition debt, but must seek court approval prior to doing so. The purpose of filing for bankruptcy is to clean the slate of the debtor. The bankruptcy courts, and the bankruptcy code, do what they can to anticipate life changes that may take place over the course of the plan. But when the unexpected arises, a debtor may need to seek assistance in the form of taking on new debt.
Pre-Petition vs. Post-Petition
The actual document filed when a debtor files for bankruptcy is called a petition. Anything that happens prior to filing the petition is called “pre-petition” and anything after filing is called “post-petition.” Generally, debts that the debtor intends to discharge are pre-petition debts. These debts are entered into prior to filing the petition, and are included in the bankruptcy. Post-petition debts are debts taken on by the debtor after the petition is filed. These debts can be debts the average debtor could expect, such as money owed to a merchant or business, or unexpected, such as high cost medical debt. These debts are generally not included in the bankruptcy, as they were not owed by the debtor as of the date the petition was filed.
Chapter 7 Bankruptcy
A chapter 7 bankruptcy is relatively straightforward. The debtor files for bankruptcy, the automatic stay goes into effect, a Section 341 Meeting of Creditors occurs, and the debtor is discharged. There is no plan to pay back creditors, as the trustee liquidates any non-exempt assets the creditor may have. Individuals and businesses may file under chapter 7, but each have different rules they must follow.When a business files for chapter 7 relief, it is liquidating all assets it owns to pay at least a portion back to the creditors. A business filing for chapter 7 relief will almost never be able to acquire post-petition debt, as the purpose of the chapter 7 bankruptcy is to liquidate all assets and close the business for good.
Then an individual files for chapter 7 relief, they have slightly different standards. The purpose of an individual filing for chapter 7 is to essentially wipe the slate clean, and allow the debtor to start fresh. An individual under chapter 7 will not be prevented from seeking post-petition debt.
Chapter 13 Bankruptcy
A chapter 13 bankruptcy is slightly more complicated. A debtor must come up with a plan to repay
creditors, either based on non-exempt equity in assets or disposable income, whichever is higher. A chapter 13 bankruptcy generally lasts five years. It is unrealistic to believe that a debtor will not need to take on some sort of debt in that time. It may be purchasing a vehicle, or even purchasing a house, but no matter the type of debt, a debtor must seek court approval.
The Automatic Stay
While a debtor’s bankruptcy is ongoing, the automatic stay is still in effect. This makes it difficult for
even post-petition creditors to be paid. The post-petition creditor may not garnish wages or move
forward with any collection efforts against the debtor so long as the automatic stay is in effect. If the debtor is not paying the post-petition creditor the money it is owed, they can file a proof of claim in the bankruptcy case and seek relief from the automatic stay.
Post-Petition Debts in Chapter 13
The bankruptcy code allows for a post-petition creditor to file a proof of claim, pursuant to Section 1305 of the bankruptcy code. The debt needs to arise after the petition was filed, and must be for property or services necessary for the debtor’s performance under the plan. These claims are in turn treated under the plan, and discharged at the conclusion of the case. The other option for a creditor is to hold off on collecting a debt until the bankruptcy case is closed. Once the case is finished, the automatic stay is no longer in effect. Any debts that arose post-petition may be collected upon. The creditor needs to be careful here, however, as pursuing any debts that arose
pre-petition would be a violation of the discharge injunction, and open the creditor up to liability.
What Debts Need to Be Paid?
Generally, ongoing obligations need to continue to be paid, even during the bankruptcy case. This
includes rent, car payments, mortgage payments, or homeowner’s association fees. Essentially, any
situation where the creditor can take away a right belonging to the debtor should continue to be paid during the pendency of the bankruptcy case. While the automatic stay is in effect, those creditors must be paid to avoid them seeking relief from the automatic stay to continue collection efforts outside of the bankruptcy court.
