Kentucky Bankruptcy Law

Counsel with Care

How can I go five years with no new debt?

A common concern of clients who are contemplating a Chapter 13 bankruptcy is the expectation that they will live within a budget for three to five years with NO new debt. I have two responses to this: 1) it can be done and 2) it does not have to be done. Okay, that is confusing so let me unpack it a little. I know that it runs very counter-cultural to suggest living without debt. The commonality of people I help expressing shock at living without credit is evidence of how our culture has bought into the idea of credit being necessary. It is almost universal that my clients ask about what the bankruptcy will do to their credit score. Again, this is evidence of the pervasive lie that credit is necessary; that one must borrow money to make it in this world.

I know that living without the use of credit is achievable. I am not entirely sure how long it has been, but it has been more than five years since I used a credit card for anything. The only loans my family carries are student loans and home loans and there are plans in place actively eliminating those. I have no idea what my credit score is because I have no need to know. I have a friend who has never incurred debt in their entire life and they are fifty years old. Also, I have a number of Chapter 13 debtor clients who are successfully living within their budgets. So, living without credit is entirely feasible. That is my first explanation and the default position I recommend: live debt free.

The second response is that a debtor in a Chapter 13 can apply to take on additional debt. Despite my best laid plans to be debt free, I am also entirely aware that there could be circumstances that would necessitate borrowing money: sudden illness, excess damage to a vehicle, a major appliance failing, and so on. These things can come about during those three to five years of a Chapter 13 bankruptcy because life goes on, bankruptcy or no. The difference is that the bankruptcy court plays a gatekeeper role in obtaining credit. This benefits both potential creditors and the debtors as well. The court’s oversight helps insure that a debtor does indeed receive and enjoy a fresh start financially by allowing only reasonably necessary new debt.

The process of obtaining additional debt requires some advance planning when possible. There is an application that must be completed and submitted to the court showing what the debt is for and why it is needed. The trustee has a chance to weigh in on the matter. Usually, a new income and expense schedule must be filed and sometimes the plan must be modified. But, if the new debt is reasonably necessary and can be managed within the budget, the court nearly always grants it, even if it may cause some reduction in the pro-rata distribution to unsecured creditors.

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February 20, 2013 - Posted by | Additional Debt, Bankruptcy, Chapter 13, Plan, Plan payments | , , , , , , , , ,

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