Your Chapter 13 plan is confirmed and you are making the payments. Then, months or even years later, a new bill pops up. Can you just stick it on your plan? The short answer is sometimes, but most of the time the answer is no, and you will need to involve the court one way or another.
With Chapter 13 you’re going to list all your debts in the plan at the time you file, and you will pay these debts over three to five years. These are pre-petition debts, debts incurred before filing. Post-petition debts are those that are created after you have filed. The most common post-petition debts are tax debts, a car loan, and medical expenses. Most of the time post-petition debts are not added to the plan. You are responsible for paying them during or after the plan.
Three to five years is a long time. A lot can happen, and you may have to take on additional debt. If you do, you have to ask the court for permission. Then you may pay the debt outside the case, or you may be able to include it in your plan payment. Your bankruptcy lawyer will amend the plan and ask the court for permission. We’re a business debt settlement company, not a law firm. Filing motions, amending a plan, converting and refiling are all legal work. When that work is needed, we refer owners to a vetted independent attorney, and the attorney-client relationship is between the owner and the attorney.
Taxes work a little differently. Under 11 U.S.C. 1305, a “governmental unit” (like the IRS or the state revenue department) can file a claim for the taxes you owe, and that claim gets priority treatment. The amount gets factored into your Chapter 13 plan, to be paid during the case. You may have to raise your plan payments to cover it.
So what will a court sign off on? The courts will let you incur debt for property or services ”necessary for the debtor’s performance under the plan,” which might include the need for a vehicle to get to work, if you can’t make your plan payments otherwise. Student loans are generally approved. Repairs to your car or your home are probably OK too, as long as they aren’t extravagant. Regular living expenses don’t require any prior approval, and emergencies like hospital bills can be dealt with once they come up.
For example, if you’re in a Chapter 13 case and you want to buy a new car, your lawyer can file a motion to incur indebtedness. This motion explains why you need a new car - let’s say your old car keeps breaking down and you can’t afford to keep fixing it - and details the basic terms of the loan - make and model of the new car, sales price, monthly payment, and length of the note. This enables the trustee to decide whether you can afford the car and whether it is fair to your creditors. A lot of times it’s approved without a hearing.
Once approved, provide the lender a copy of the order authorizing the purchase to close the deal. A lot of car lenders that deal with people in bankruptcy are used to having the court order. You’ll also need to prepare a new budget with the change in expense if it’s being paid outside of the case or with a change in the plan payment if it’s being paid through the plan.
Once you have permission, the debt is handled in one of two ways. The first is to pay it outside the case. An example of this is a $1,000 medical bill you incurred while in Chapter 13. At the end of your plan the hospital would expect to receive payment from you. They cannot garnish wages or sue you while in bankruptcy unless they successfully ask the judge to have the automatic stay removed. A lender can require that you pay your car loan outside of the case.
The second is to fold it into the plan. If you’re going to include the debt in the plan, you have to get the trustee’s consent. Usually, that’s done in conjunction with your motion to incur indebtedness, though sometimes trustee consent before incurring the debt is not possible and the court considers the circumstances; the creditor must also agree to being paid through the plan, and it has to file a proof of claim. A creditor does not have to agree - if you can only offer a fraction of the debt with the rest discharged, it can wait until after the bankruptcy ends to collect.
Without the Court’s Approval
But what happens if you don’t get court approval? If you are in Chapter 13 you are not supposed to obtain any new credit without the court’s approval. All your income is part of your bankruptcy estate which must pay all your existing creditors. If you pay a post-petition debt without the court’s permission, the trustee may argue that not all of your disposable income is funding your plan, and ask the court to dismiss your case. You may be able to get the court’s approval after the fact. You will have to demonstrate to the court that it was not possible to get approval ahead of time. Typically this comes up in cases of medical bills after an accident.
Two Extreme Solutions
Sometimes post-petition debts are so high that you just can’t pay them after a Chapter 13 ends. For example, 20,000 dollars in medical debt. If amending the plan isn’t enough, there are two extreme solutions. First, you may be able to convert the Chapter 13 to a Chapter 7. Your Chapter 7 case will include your post-petition debts. Those debts become dischargeable.
The other option is to dismiss the Chapter 13 and then file a new Chapter 13. The new Chapter 13 would include the new debts. There are usually no problems in dismissing a Chapter 13 under these circumstances. You may be able to file the new one immediately after the dismissal, but the court can impose a 180 day bar date and in that case, you would have to wait 6 months before you could file another case.
At Delancey Street, our senior advisors negotiate with funders and lenders for less than the full balance owed, and we do not sell another loan. If you are trying to decide whether to negotiate, settle or stay in or file bankruptcy, a first consultation is free and confidential. We will tell you if your case can’t be won, or there is a cheaper option, on the first call.
