A Chapter 13 bankruptcy, commonly called the wage earner’s plan, is a type of bankruptcy where the filing debtor makes a plan to pay back all or a portion of unsecured debt over 3 or 5 years with disposable monthly income. Any unsecured debt not paid back in the plan will be discharged at the end of the bankruptcy.
During any bankruptcy, the filing debtor is not to make any new debt during the plan without the consent of the bankruptcy court. The bankruptcy trustee is assigned by the court to oversee the administration of the plan on behalf of the creditors. Therefore, the bankruptcy trustee has a vital interest in whether or not a filing debtor incurs new debt.
In a Chapter 13, a debtor may make a motion to incur debt as part of the plan to be confirmed by the bankruptcy court. He or she may make this request if they are needing to purchase something like a reliable automobile or for a necessity like that of a washing machine. Often, the court allows a lump sum amount that can be borrowed to be included in the confirmed plan.
The confirmation order may include such wording as motion to incur debt with an explanation of how much the debt cannot exceed without approval from the court, and it will normally be a cumulative figure for the entire duration of the plan. That means the debtor does not have to advise the bankruptcy court to borrow money during the plan up to the limits allowed by the confirmation.
It is particularly interesting to note here, however, that the trustee has a vested interest in knowing the terms of any loan being sought, how the new loan will affect the plan, and that there may be amended schedules. Because of the vested interest held by the trustee, a filing Chapter 13 debtor might want to realize that just because the court has given permission to incur debt without any further approval of the court does not mean that the trustee’s obligation stops.
Therefore, depending on each trustee’s own rules and guidelines, you may still have to notify the trustee of any debt you might incur during the plan. That includes the amount already approved by the confirmation and bankruptcy court. In other words, the wording in confirmation orders can become a little misleading to the average layman with little experience in the bankruptcy system. Such wording assures the debtor that he or she can incur debt up to the maximum limit allowed by the plan, but he or she must still have the approval of the trustee.
Any further debt a filing debtor needs to incur, that is more than the original amount included in the plan, will require another formal motion to incur debt filed in the bankruptcy court to be heard by the bankruptcy judge.
Bankruptcy laws can become very complicated to the average layman. The local rules and guidelines for each bankruptcy court can add to the complexity of the bankruptcy system. That is why it is recommended to consult with an experienced bankruptcy attorney when you decide you have to file for bankruptcy protection.
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