When you file a petition for bankruptcy protection, you are asking a federal court to protect you from creditors. The court issues an automatic stay of all collection actions, including lawsuits, and gives you time to reorganize your finances and prepare for a fresh start. In a Chapter 13 bankruptcy case, you set up a repayment plan under the supervision of a court-appointed trustee, but you still may be able to handle some debts outside of the repayment plan.
The Chapter 13 Plan
In a Chapter 13 repayment plan, you agree to make a monthly lump-sum payment to the Chapter 13 trustee, who disburses to each creditor. In a typical plan, the payments are spread over three to five years. The Chapter 13 trustee collects your payments to pay outstanding taxes, past due mortgage balances, car loans and other debts. After the plan is completed and you do everything you're supposed to do in the case, the court enters an order discharging your liability on eligible debts. Debts that are not eligible for discharge can be paid in full through the plan or modified according to the applicable sections of the Bankruptcy Code.
Mortgages in Chapter 13
If you file Chapter 13 and you have a mortgage, you may or may not be able to pay the mortgage outside the plan. If you were behind on the mortgage when you filed bankruptcy, the amount that you were past due - your pre-petition arrears - must be paid through the trustee. Your ongoing mortgage payments after filing may either be paid directly to the lender outside of the plan or to the trustee, depending upon the rules of your jurisdiction (every bankruptcy court has its own local rules).
Other Secured Loans
In the case of other secured loans, like car loans, the debtor can petition for payments outside the bankruptcy plan, such as an auto finance company or a furniture store that has agreed to lend money on pledged collateral. Usually, these types of claims are paid in full through the bankruptcy trustee; however, you can propose to pay them outside of the plan instead, and if no one objects, the court will generally allow it.
New Debts Post-Bankruptcy
The bankruptcy law restricts your ability to take on new debts; if you want to borrow money while you're in a Chapter 13, you need bankruptcy court approval.
If you do incur debt after you file your bankruptcy case, it is not included in your bankruptcy, and you must pay the debts outside the plan. If you convert your case to a Chapter 7 after incurring new debt in Chapter 13, you may be able to add those debts to your Chapter 7 case and obtain a discharge, however.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.