Can I Get a Credit Card During Chapter 13?

Chapter 13 bankruptcy provides individuals a structured pathway to financial recovery, allowing them to reorganize debts under court supervision. This process typically involves a repayment plan spanning three to five years, during which debtors make regular payments to a trustee who then distributes funds to creditors. During this period, obtaining new credit, including credit cards, is generally restricted. This restriction safeguards the integrity of the established repayment plan and protects the interests of existing creditors, ensuring new financial obligations do not jeopardize the debtor’s ability to fulfill their commitments.

Court or Trustee Approval Requirements

Obtaining new credit, such as a credit card, during an active Chapter 13 bankruptcy case necessitates formal approval from either the bankruptcy court or the Chapter 13 trustee. This requirement ensures that any new debt does not undermine the debtor’s ability to adhere to their court-approved repayment plan. New unsecured debt, particularly credit cards, faces scrutiny because it can increase the debtor’s financial burden and potentially compromise their commitment to existing creditors.

Approval for new credit is generally granted only under specific, justifiable circumstances. These often include genuine emergencies, such as unforeseen medical expenses, or essential needs like replacing a work vehicle or necessary home repairs. Such debt must directly support the debtor’s ability to continue making plan payments and not unfairly prejudice existing creditors. Without prior authorization, incurring new debt could lead to severe consequences, including the dismissal of the bankruptcy case.

Information Needed for Approval

Before seeking approval for new credit, debtors must compile comprehensive information and documentation to justify the request. This includes a clear and specific reason for needing the credit, demonstrating its necessity rather than a discretionary desire. Debtors need to specify the proposed amount of credit, along with the detailed terms of the proposed credit, such as the interest rate, any associated fees, and the repayment schedule. It is also important to show how the new debt will impact the existing Chapter 13 plan and the debtor’s continued ability to make all required plan payments.

Supporting documentation typically includes proof of current income, such as recent pay stubs, and a detailed list of current monthly expenses. If the new credit is for a specific purpose, such as a vehicle purchase, details about the proposed lender and the item to be purchased are necessary. Debtors may also need to provide an updated financial statement to reflect how the new payment will integrate into their budget. This preparation ensures that the court or trustee has a complete financial picture to assess the request.

Seeking and Using Approved Credit

The formal process of seeking approval from the court or trustee begins with the debtor’s attorney filing a “Motion to Incur Debt” with the bankruptcy court. This motion details the reasons for the request, the proposed credit terms, and how the new debt will affect the Chapter 13 plan. A copy of this motion is then served on the Chapter 13 trustee and all creditors, providing them an opportunity to review and potentially object to the request.

The Chapter 13 trustee will often review the request. If the trustee objects or if the debt amount exceeds certain thresholds, a court hearing will be scheduled where the debtor’s attorney can present the case to the bankruptcy judge. If the motion is approved, the court will issue an order authorizing the debtor to incur the new debt. Debtors must then strictly adhere to the approved terms and provide a copy of the court order to the prospective lender when applying for the credit.

Other Credit Options During Chapter 13

While obtaining traditional unsecured credit cards during Chapter 13 is challenging, other credit options may be more accessible and less scrutinized.

Secured Credit Cards

Secured credit cards are a common alternative, as they require a cash deposit that acts as collateral, thereby reducing risk for the lender. This deposit typically sets the credit limit, and responsible use, including timely payments, can help rebuild credit history.

Credit Builder Loans

Credit builder loans offer another avenue for establishing positive payment history. These loans involve a financial institution holding the loan amount in a savings account while the borrower makes regular payments, which are then reported to credit bureaus. Upon successful repayment, the borrower receives the funds, and their credit profile has improved.

Authorized User Status

Becoming an authorized user on another person’s credit card may offer some credit-building benefits without incurring personal debt, though it has limitations for significant credit score improvement.

Specialized Programs

Some local credit unions or community development financial institutions may also offer specific programs designed for individuals in bankruptcy, providing tailored financial products.