Applying for a Credit Card during Chapter 13 Bankruptcy

Written by James Hirby and Fact Checked by The Law Dictionary Staff  

Federal Bankruptcy law seeks to protect itself from being abused and puts robust accountability on those who advise a debtor, such as a bankruptcy attorney, as well as on the debtor his or her self when it comes to potential abuse or even fraud.  Section 526 of the Federal Bankruptcy Law prohibits a debtor’s attorney from suggesting that its client debtor go rack up as much credit card debt as is [humanly?] possible before filing for bankruptcy relief.  Section 528 details what a “debt relief agency” is required to do, and bankruptcy attorneys are debt relief agencies, by federal law.

As a part of a Chapter 13 bankruptcy payment plan, the debtor is not allowed to increase the amount of debt without the bankruptcy trustee’s permission.  If this occurs, the trustee will be cancelling the plan and dismissing the bankruptcy.  Trustees take their situations seriously and expect the same from the debtor.  Neither the bankruptcy courts nor the trustee will abide by any action that is perceived to be abusing the bankruptcy laws of either the Federal government or the sovereign state in which the court resides.  Abusing the law will also possibly subject the debtor to litigation for violation if fraud is suspected.  The trustee and the bankruptcy court will quickly turn pertinent information over to the district attorney for pursuit.

The biggest and most difficult area of compliance to the above is with credit cards.  The debtor is allowed to retain them.  The debtor is prohibited from using them, regardless of the reason without trustee permission.  A “Motion to Incur Additional Debt” must be filed and will cost a fee of $150 in most states.  The fee can be waived or returned by the court, or be waived by the trustee.  The trustee will again interview the debtor under oath about the contents of and reasons for the motion.  Then the trustee will either allow or refuse the request.  Many people who experienced this identified some of the difficulties with this motion.  The trustee has to assess the impact to the likely confirmed payment plan that has been put in place.  This plan is for a minimum of 36 months and can extend to up to 60 months.  If there is sufficient impact from permitted additional debt, the plan likely has to be revised.  This is additional work and cost to the court, the trustee, and the debtor.  Based on all of this, most people stated that it is highly unlikely that a trustee would allow an additional credit card UNLESS it has a very low credit level and was shown to be paid off at the end of the month.  By law, each use of this credit card is supposed to be requested by separate motions.  It is very easy to believe that a trustee will quickly tire of this activity.  It is therefore easy to believe that an experience trustee will likely suspend some or the entire payment plan for a month or two or three to get past the emergency leading to the original motion, then get back to the payment plan quickly.

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