A lot can happen during the three to five years of a debtor’s Chapter 13 repayment plan. Even though the Chapter 13 trustee forbids the use of credit during the repayment period, the trustee is powerless against life. To paraphrase Forrest Gump, “Stuff happens.”
Post-Petition Tax Debts
One of the most common post-petition debts that happen during Chapter 13 bankruptcy is the tax debt – so common that Congress put in a special provision for it in the Bankruptcy Code. See 11 U.S.C. § 1305(a)(1). The bankruptcy court allows tax creditors to file claims for post-petition tax debts, and then treats the claim as a pre-petition, priority debt (meaning that it must be paid in full during the bankruptcy case). The debtor is required to amend his repayment plan to account for this new debt, which may mean making a larger payment each month. This may also cause unsecured creditors to receive less.
Post-Petition Consumer Debts Incurred Without Court Approval
During Chapter 13 bankruptcy all of the debtor’s income belongs to the bankruptcy estate. That is why using credit is forbidden – the debtor’s income cannot be used to repay post-petition creditors during the bankruptcy case without permission. If a new credit debt is incurred without court permission, it is not part of the bankruptcy case, no portion is discharged at the end of the case, and, if the debtor attempts to pay the post-petition debt, the trustee or creditor may file an objection stating that the debtor is not devoting all disposable income to repaying bankruptcy debts.
Despite the Bankruptcy Code’s prohibition and the trustee’s admonition, some debts arise without prior court permission. The debtor may still seek the court’s approval by showing that it was not possible to get court approval ahead of time. For example, a medical bill after a car accident is not foreseeable, and it is impractical (or perhaps impossible) to get the court’s permission prior to receiving medical treatment. To include this type of debt in the debtor’s bankruptcy case, the creditor must agree to submit a proof of claim, and the debtor must amend the bankruptcy plan. If the bankruptcy court refuses to include the debt in the repayment plan, the automatic stay will still prevent the creditor from seeking payment from property of the bankruptcy estate (including the debtor’s wages) during the Chapter 13 case. If the creditor refuses to submit a proof of claim and receive partial repayment through the plan, the debtor may consider either conversion, or dismissal and refilling later to include this new debt.
Post-Petition Consumer Debts Incurred With Court Approval
The most common post-petition debt incurred with court approval is the new car purchase. The debtor must first contact the trustee’s office and gain the trustee’s support before asking the bankruptcy court for permission to incur the debt. Generally, the court will approve new debt, or an extension of credit, if it is necessary for the completion of the bankruptcy plan. See Section 1305(a)(2)(approval of credit is available “for property or services necessary for the debtor’s performance under the plan”). In other words, the debtor must show that he or she needs a car to get to work to make money to pay the plan payment. With court approval, the debtor may include the debt in the plan once the creditor files a proof of claim.
To buy a car during Chapter 13 bankruptcy the debtor needs to (1) negotiate financing and loan terms with the car dealer; (2) contact the trustee, explain why the car is necessary to complete the plan, and state the terms of the loan and how the debtor will pay it; (3) petition the bankruptcy court to approve the new debt; (4) file an amended plan and schedules to account for the new car payment; and (5) ensure that the auto lender files a proof of claim. If all of these steps are followed, the auto lender has a secured interest in the vehicle and receives the full contract price during the bankruptcy case.