Individuals usually file under either Chapter 7 or Chapter 13 of the bankruptcy code. Chapter 7 is usually a short process and can be over within three to five months. Chapter 13, however, can take up to three to five years to get through the process. However, you're probably going to be bombarded with offers of credit card companies, loan companies, and auto salesman—all of whom are eager to help you on your way back up the credit ladder—starting with the day you first file your bankruptcy claim. Can you take one of these offers of credit if you want it or need it? Or is that a sure-fire way to get yourself into trouble with the bankruptcy trustee? This is what you should know.
You may actually be able to take a loan or open a line of credit before your bankruptcy is settled.
Because life doesn't exactly grind to a halt while you're waiting on your discharge, there's always the possibility that you may need to obtain a loan or a line of credit sometime before your bankruptcy is over. Companies have built a whole industry around people in your situation. However, just because the loans are there doesn't mean that you can automatically accept one without taking the proper steps.
You are going to have to justify the credit or loan to your bankruptcy trustee.
As long as your bankruptcy is open, you have to notify the bankruptcy trustee about any line of credit or loan that you want to take before you take it. You need to seek the trustee's permission to get the loan or line of credit. That means offering a valid justification for treating this loan or line of credit differently than your other debts while the bankruptcy is open. It won't be discharged (like in Chapter 7) or only partially repaid (like in Chapter 13). You also have to convince the trustee that it makes sense to allow you to take on new debt before your old debts are even cleared.
The key to winning the trustee's approval is showing how the credit or loan can actually help you avoid future financial problems. If you're in a Chapter 13 bankruptcy, you may be able to show the judge how the credit or loan can help you avoid defaulting to the more severe Chapter 7 instead.
Keep in mind types of credit lines or loans can be considered a positive by the trustee.
- A car loan. If your car died and you don't have ready access to public transportation to work, you'll more than likely be able to convince the trustee that the car loan is a necessity, not a luxury.
- A secured credit card. People seldom carry cash, checks are a rarity these days, and you need a credit card to purchase anything online. If you have online billing, a credit card is the easiest way to keep your utilities on as well. If you do a lot of traveling for work, a credit card is essential in order to book a room somewhere if you get tired on the road. The trustee may go for the idea of a secured credit card even while your bankruptcy is pending if your attorney presents the request just right.
- A medical credit card. Cards like Care Credit are used to help people pay their medical expenses. If you need dental work, glasses, or a hearing aid, the trustee may be willing to let you take a card like this out in order to protect your health.
- A house. If you're in Chapter 13 and the perfect house opportunity comes up, it can't hurt to ask for permission to get a loan. If you can show that the house loan and taxes combined will equal less than what you're currently paying in rent, you can always argue that it will make your ability to stick out the repayment plan you have .
While these are just examples, they give you a good idea of what the trustee will be looking for: is this debt that seems to have a purpose? Is it reasonable under the circumstances? Does it make it easier to manage your finances long term? Just make sure that you discuss the issue carefully with your bankruptcy attorney before you decide on a course of action.