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Borrowing while in Chapter 13

On Behalf of | Oct 30, 2023 | Chapter 13 Bankruptcy

When someone files for protection under bankruptcy laws, they typically seek to get out of obligations they cannot repay. It may seem curious that a Michigan debtor might attempt to take out a loan while in bankruptcy, but circumstances could move the person to make this decision. However, procuring a loan while in Chapter 13 bankruptcy could be quite challenging.

Chapter 13 bankruptcy and lending

Chapter 13 bankruptcy is not total liquidation bankruptcy like Chapter 7. With Chapter 13 bankruptcy, the debtor restructures their obligations and sets up a court-approved payment plan. The payment plans run for three to five years, and a trustee oversees the process. Debtors must follow the rules associated with Chapter 13 bankruptcy, and those rules could affect any attempt to procure additional financing.

Seeking a loan while in Chapter 13 involves requesting the court’s permission. If the court does not approve the debtor’s request, the would-be borrower may need to pursue other options. The debtor must meet specific criteria when seeking a loan. The court would not likely approve unnecessary borrowing.

Credit scores and Chapter 13

While Chapter 13 presents many potential benefits to someone struggling with crushing debt, the effect on a credit score will be negative. Those negative remarks remain on a credit history for up to seven years. Receiving approvals on loan applications in the seven years following Chapter 13 could be difficult. Filing while in Chapter 13 might be far more challenging.

Individual circumstances vary. Some may find it necessary to seek a loan while paying their Chapter 13 obligations. Expect the parties to provide paperwork to the bankruptcy court when interested in a loan. Ultimately, there are numerous steps, but someone might find following them worth the effort.