Can a Person Apply for a New Credit Card During Chapter 13?

By Keith Evans

  • Overview

    Long considered "rock bottom" in the financial world, bankruptcy has recently shed some of its stigma and regained ground as a viable option for overburdened consumers. This article explores some some credit options available to debtors under Chapter 13 bankruptcy.
  • Types

    On the consumer level, two types of bankruptcy are most prevalent: Chapter 7 and Chapter 13. Under Chapter 7 bankruptcy, the debtor is forced by the court to surrender material possessions--sometimes including cars and real estate--which is liquidated to pay creditors. Chapter 13 is widely considered more forgiving, since the debtor does make some attempt to repay creditors. Under this chapter, the debtor enters a court-structured and supervised repayment plan in which a portion of all income is garnished by the courts and funneled to the creditors. Under this plan, which typically lasts 3 to 5 years, a trustee oversees the repayment of debt and supervises any further indebtedness until the plan ends.
  • Credit Potential

    While the debtor is protected under Chapter 13 bankruptcy, he is generally disallowed by the court to incur any additional debts. In certain circumstances, however, the court trustee can approve some debts if they are deemed essential to the debtor. Some examples of debts that might be approved by a trustee while the debtor is still under court protection include an auto finance loan when the debtor's car becomes unusable, a federally guaranteed student loan if the debtor returns to school and even a mortgage if the debtor must relocate due to employment needs.

  • Credit Cards and Personal Loans

    While trustees have been known to approve credit card and personal loan requests during the Chapter 13 plan, these types of loans are generally not considered essential. The likelihood of a trustee to approve credit requests during bankruptcy may also be tied to the amount of the debt being repayed by the plan; if the court is securing less than 100 percent of debt repayment, trustees are far less likely to approve credit requests than if the debtor has arranged to repay all debts.
  • Credit Applications

    While the Chapter 13 trustee may or may not approve a debtor's request to take on additional loans, creditors use a slightly different criteria for deciding whether to grant credit. If a trustee approves a request for credit, the finance company reviews the debtor's application and makes a decision based on that individual's past performance, credit score and perceived likelihood to repay. While a bankruptcy filing has a significant negative impact on an individual's credit score, many finance companies are willing to assume the risk of issuing credit to bankruptcy filers--at a considerably higher interest rate, of course--due to the high profits to be obtained and the borrower's inability to file bankruptcy again for a period of time.
  • Effects

    The effects of bankruptcy are profound and long-lasting. Some mortgage companies may view past bankruptcies as a valid reason to increase interest rates, and signs of repayment difficulty after emerging from bankruptcy may mean a credit application is declined altogether. Still, bankruptcy does not have to be equivalent to financial death. Debtors who treat the process as a means to mitigate past mistakes and proceed with caution and responsibility--and especially debtors who are allowed to take on new responsibilities while under protection--can use the protection afforded by the process to build positive new credit and vastly improve their credit history.
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