Can You Get a Loan While in Bankruptcy?

Navigating personal finances during bankruptcy often raises questions about obtaining new credit. While many believe securing a loan is impossible, bankruptcy does not always prevent acquiring new debt. The process is nuanced, varying by bankruptcy type and specific circumstances.

General Rules for Obtaining New Credit During Bankruptcy

Filing for bankruptcy initiates a structured legal process for financial relief, but it also imposes limitations on incurring new financial obligations. A distinction exists between pre-petition debt (owed before filing) and post-petition debt (incurred after filing). Pre-petition debts are addressed in bankruptcy, while post-petition debts are generally not discharged.

Obtaining new credit during an active bankruptcy case typically requires court approval. This oversight is in place because incurring additional debt could jeopardize the debtor’s ability to successfully complete their bankruptcy plan or negatively impact creditors. Lenders also exercise increased scrutiny, often requiring evidence of necessity and a clear repayment strategy. Without proper authorization, incurring new debt can lead to severe consequences, including dismissal of the bankruptcy case.

Specifics for Chapter 7 Filers

For individuals undergoing Chapter 7 bankruptcy, which involves liquidating non-exempt assets to repay creditors, obtaining new, unsecured credit is generally difficult and discouraged. Chapter 7 aims to provide a fresh start by discharging most existing debts, and adding new unsecured obligations runs counter to this objective. Courts are particularly strict, as new debt can undermine the liquidation process and harm creditors.

However, new secured debt might be considered in rare instances. This applies when new debt is deemed necessary for the debtor’s well-being or ability to maintain employment, such as a modest vehicle loan for transportation to work or a loan for emergency medical procedures. Even in these limited scenarios, court approval is mandatory, and the debtor must demonstrate a clear need and a feasible repayment plan that does not interfere with the bankruptcy’s objectives.

Specifics for Chapter 13 Filers

Chapter 13 bankruptcy, a reorganization process involving a court-approved repayment plan over three to five years, generally offers more flexibility for incurring new debt compared to Chapter 7. This is because debtors actively make payments to creditors under a structured plan, which can provide a clearer picture of their financial capacity. Despite this flexibility, obtaining new credit still necessitates explicit approval from the bankruptcy court, often with input from the Chapter 13 trustee.

Common types of new secured loans that may be approved include vehicle loans, particularly if a car is required for employment or essential transportation. New mortgages or refinancing existing ones can also be approved if it leads to a more favorable financial position for the debtor and does not jeopardize the repayment plan. The Chapter 13 trustee plays a significant role, evaluating whether the proposed debt is reasonable and will not impede the debtor’s ability to fulfill plan obligations.

The Process for Court Approval of New Debt

Obtaining court approval to incur new debt during bankruptcy is a structured process that requires diligent preparation and adherence to legal procedures. The debtor must first gather specific information and documentation to support their request. This typically includes a detailed explanation of the reason for the loan, the proposed loan terms such as the interest rate, repayment schedule, and loan amount, and a comprehensive overview of the debtor’s current financial situation, including income, expenses, and budget.

A formal request, known as a “motion to incur debt,” must then be filed with the bankruptcy court. This motion should clearly articulate how the new debt will be repaid without jeopardizing the existing bankruptcy plan. Notice of this motion must be provided to relevant parties, including the bankruptcy trustee and creditors.

During a court hearing, the judge considers the necessity of the debt, the debtor’s ability to repay it, and its potential impact on creditors and the overall bankruptcy plan. If the court is satisfied with the debtor’s justification and repayment feasibility, the motion may be approved, sometimes with specific conditions. Conversely, if the repayment plan appears unfeasible or the necessity of the debt is not adequately demonstrated, the request may be denied. The process can take several weeks, and it is important for the debtor to understand the court’s order if the motion is approved and to adjust their Chapter 13 payment plan if necessary.