Debtors in Chapter 13 bankruptcy are not allowed to borrow unless they have bankruptcy court’s permission. But is it really a good idea for debtors in Chapter 13 bankruptcy to take on new debt? Well the answer is not as simple as yes or no.
Why a debtor may or may not want to borrow during their Chapter 13:
- The number reason that a debtor may not want to borrow money while in Chapter 13 bankruptcy is that they will be taking on new debt when their bankruptcy’s sole purpose was to eliminate debt. This new debt could cause unwelcome financial strain.
- The debtor may not want to take on new debt if existing creditors in the Chapter 13 bankruptcy along with the bankruptcy trustee will perceive the debtor’s willingness to take on new debt as an indicator of their ability to make larger payments to the bankruptcy repayment plan.
- The debtor may want to take on new debt if they lose use of their primary vehicle during bankruptcy and need to purchase a new one in order to travel to and from work. This is one of the most common reasons debtors borrow money during Chapter 13 bankruptcy.
There are also some benefits for debtors to take on new loans in Chapter 13 bankruptcy. Since Chapter 13 bankruptcy can last anywhere from three to five years, it would benefit debtors if they were able to get a head start on rebuilding their credit score and history. For example, the debtor who takes out a car loan has a head start on rebuilding a history of timely payments. But of course there is the added risk that the debtor will not be able to handle their existing Chapter 13 bankruptcy repayment plan and the new car payment.