Can you apply for credit after Chapter 13 bankruptcy?
Kim McGrigg is Community Manager for Money Management International, where she provides personal finance education information to consumers.
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Dear Credit Care,
In March 2011, my husband and I filed Chapter 13, and it was
approved by the courts. We are paying our monthly payments to the trustee and
will continue paying for five years. My question is: Can we try to apply for a
credit card just for emergencies? -- Debra
Filing a Chapter 13 bankruptcy means that you and your husband
were required to attend a credit counseling session before you could file. You
were also required to submit a repayment plan to the courts to pay your
priority, secured and unsecured debts.
- Priority debts include most
taxes and bankruptcy proceedings fees.
- Secured debts include those
that have some sort of collateral such as auto loans and mortgages.
- Unsecured loans are typically
credit card, payday loan or personal loan debt.
As a general rule, to keep a collateral loan item, the repayment
plan must include repayment of at least the value of the item. Or in the case
of a mortgage, all arrears on the account must be paid within the repayment
I mention all of this because at the credit counseling session -- and
even more so at the creditor meeting convened by the trustee -- you had your
finances explored with a fine-toothed comb. No income or expense was excluded
from the scrutiny, and you are paying every penny of "disposable income" that
you have to the trustee to satisfy your creditors. Due to the fact that you are
utilizing all your discretionary income to repay your debt through the
bankruptcy system, you must have permission from the trustee to incur any new
debt. You would need to provide proof to the court that the new debt would not
interfere with your ability to complete your repayment plan.
Rather than requesting permission from the trustee to apply for a
credit card for emergencies, I would recommend that you begin saving whatever
you can each month in an emergency savings account. I know that your budget is
tight due to the repayment plan, but even small amounts will add up during the
time period you must repay your creditors through the courts. For example,
emptying out your pockets at the end of the day and saving the coins you have in
a jar could add up to as much as $250 in a year. Be sure to roll the coins
yourself and deposit them in a savings account at your bank, since using a coin-counting
machine at the grocery store will take up to 10 percent of your money.
Another savings tip is to eat in more and out less. Packing a
lunch instead of eating out could save you $5 each time. If you are buying
lunch twice a week now, consider eating out only once and you could save
another $250 in a year's time.
Once your bankruptcy has been discharged, continue to save and set
a goal for your emergency savings cushion of six to 12 months of living
expenses. With a fully funded emergency savings in place, it will help you
avoid unwanted debt in the future.
Handle your credit with care!
See related: Alternate strategies for saving for an emergency fund, Questions to help you find the right credit counselor
Kim McGrigg is the community manager for Money Management International, the largest nonprofit, full-service credit counseling agency in the United States. You can find more money management advice on Blogging for Change and MMI's Facebook page.
Credit Care answers a question about a debt or credit issue from a CreditCards.com reader each week.
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Published: October 31, 2011