Over the last three weeks I wrote about the ability of Chapter 7 debtors to access credit after receiving a bankruptcy discharge. Now, let’s look at the ability of Chapter 13 debtors to access credit - and because of the length of time Chapter 13 debtors are “in” their bankruptcy, I’ll deviate a little from the title of this blog and look at the ability to access credit during the time a Chapter 13 debtor is “in” her bankruptcy, as well as access to credit after the Chapter 13 discharge is entered.
Credit During a Chapter 13 Bankruptcy
Chapter 13 Bankruptcy cases differ greatly from Chapter 7 cases is terms of time. The chapter 7 debtor typically receives a general discharge of debt three and one-half to four months after the date the bankruptcy case is filed. Chapter 13 cases take much longer from the date of filing to the date of discharge. The minimum period of time a Chapter 13 debtor can be in a Chapter 13 plan is 36 months (three years); the maximum period of time a Chapter 13 debtor can be in a Chapter 13 plan is 60 months (five years).
While it is realistic to expect that the typical Chapter 7 debtor will not need to access credit during the months that a Chapter 7 case is pending, it is not, in many cases, realistic to expect that a Chapter 13 debtor can make it all the way through a Chapter 13 Plan without having to access credit. During the three to five year period that a chapter 13 case is pending, we can assume that some form of credit might be desired by chapter 13 debtors.
The Chapter 13 debtor, in an active case and in need of credit in some form has two significant issues to confront: the legal structure of chapter 13 and the marketplace for credit that will be reluctant to extend credit. Let’s look at the legal structure, first.
The Chapter 13 Trustee’s Role
The Bankruptcy Code requires the Chapter 13 trustee to “advise” and “assist” the chapter 13 debtor in the performance of the Chapter 13 plan. And the performance of every chapter 13 plan requires that the debtor be able to make payments into the plan in a timely matter. Because every Chapter 13 debtor’s budget is critical to the debtor’s performance on the plan, Chapter 13 trustees tell debtors that the debtor cannot borrow money or obtain financing without the Chapter 13 Trustee’s prior permission. If Chapter 13 debtors are given the unrestricted right to borrow money or finance purchases, there is a real risk that the debtor will not be able to afford the monthly payment set out in the confirmed Chapter 13 plan. So the trustee, in his capacity as assisting the Chapter 13 debtor, has veto power over any proposed loan or financing package to which the debtor might want to commit.
For this reason, it is difficult, without compelling circumstances, for a “typical” Chapter 13 debtor to get trustee approval for unsecured debts, credit cards, etc. Car financing is another story.
Chapter 13 plans get paid from a debtor’s disposable income. In order to generate that income, debtors have to get to and from work. And for almost everyone in greater Minnesota, that means driving a car or truck to and from a job. Many people with financial problems are driving older, high mileage vehicles because they simply can’t afford to replace the car with a newer, more reliable model. For the Chapter 13 debtor in a five year plan, there is an inevitability about the need, during the life of the Chapter 13 plan, to replace an older vehicle.
The Chapter 13 debtor who finds herself in need of car financing while the chapter 13 is pending needs to understand the process involved to take her from “I need a car” to “I have financing for the car I need.
As I mentioned earlier, the chapter 13 trustee has veto power over a chapter 13 debtor’s ability to borrow money. So for the car-needy chapter 13 debtor, the first step in the process of getting a car loan is to find a reasonably-priced used vehicle (the Chapter 13 trustee will not approve the purchase of a new vehicle). Once a car has been selected, the Chapter 13 debtor, through her Minnesota bankruptcy attorney, asks for the trustee’s permission to enter into the vehicle loan. Provided that the proposed car payment seems reasonable (in most cases, less than $500 a month), the Chapter 13 trustee will issue a letter stating that he has no objection to the debtor receiving auto loan financing. Once the “trustee letter” has been issued, the auto financing goes through just as though there is no bankruptcy case pending.
The Credit Market’s Role
The other inhibiting factor that makes qualifying for loans while a chapter 13 debtor is in an active bankruptcy is the marketplace. Retail charge cards, revolving credit accounts and open lines of credit are difficult for Chapter 13 debtors to obtain. Why? The reason is the ability of Chapter 13 debtors to convert their case to a Chapter 7 case. If a Chapter 13 debtor is qualified to receive a Chapter 7 discharge on the day the Chapter 13 case is filed, the Chapter 13 debtor has the right to convert the case to a Chapter 7. And when a case is converted, debt that was incurred by the chapter 13 debtor during the Chapter 13 case can be included in the conversion, and thus discharged when the Chapter 7 discharge is entered. So a retailer, for instance, could give a Chapter 13 debtor a charge card, have the Chapter 13 debtor use the card and then have the chapter 13 debtor discharge his obligation to pay the account balance by converting from a Chapter 13 case to a Chapter 7.
Another feature of Chapter 13 is that the Chapter 13 will stop wage garnishment from a paycheck or bank account while the case is pending. So even for the Chapter 13 debtor who chooses not to convert to a Chapter 7 case, the post-filing creditor is extremely limited in collection options if a Chapter 13 debtor falls behind on post-filing debt.
For those reasons, credit - other than secured credit like a car loan - is difficult to obtain while a Chapter 13 case is pending.
Next week I’ll write about getting back up on your financial feet following the Chapter 13 discharge.