Cite as: Keith M. Lundin, Lundin On Chapter 13, § 69.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
Before filing, the debtor should be instructed not to borrow money or incur new debt without consulting counsel and seeking the trustee’s permission.1 It will occasionally be necessary for a consumer debtor to incur debt prior to confirmation, for example, emergency medical care or repairs to an automobile. Chapter 13 debtors engaged in business will be even more likely to need credit prior to confirmation.2
Unfortunately, the Bankruptcy Code is less than clear about how a Chapter 13 debtor should go about obtaining credit prior to confirmation. If the debtor is engaged in business, § 1304(b) of the Code empowers the debtor to use § 364 of the Code to obtain credit. Section 364 is quite familiar to Chapter 11 practitioners. It authorizes both unsecured and secured borrowing after notice and a hearing. A Chapter 13 debtor engaged in business would simply file a motion to obtain credit under § 364, describing the terms of the borrowing with notice to all creditors and the trustee.
A Chapter 13 debtor not engaged in business cannot point to any specific statutory authority for obtaining credit after the petition. Section 364 is worded in terms of “the trustee.” Arguably, by negative implication from § 1304(b), only a Chapter 13 debtor engaged in business is authorized by the Code to use the power of a trustee to obtain credit under § 364. Obviously, even Chapter 13 debtors not engaged in business will occasionally need to obtain credit during the Chapter 13 case. There are no reported Chapter 13 decisions categorically refusing to permit nonbusiness debtors to incur debt necessary to the debtor’s performance of a plan. Neither are there any decisions that identify any specific statutory authority for a nonbusiness debtor to borrow money before confirmation. But it is true in Chapter 13 programs everywhere that nonbusiness debtors routinely obtain credit for property and services necessary to performance of a plan. Other provisions of the Code contemplate that Chapter 13 debtors will incur new debt during the case.3 The failure to empower nonbusiness debtors to use § 364 was probably just an oversight by Congress.
If the new debt is for property or services necessary for the debtor’s performance under the plan,4 the debt may constitute a postpetition claim under 11 U.S.C. § 1305(a), and prior approval by the trustee is necessary if the postpetition claim is to be eligible for allowance or discharge in the Chapter 13 case.5
In some jurisdictions, the order to commence making payments consistent with 11 U.S.C. § 1326(a)6 is entered immediately at the filing of the plan, and that order prohibits the debtor from incurring new debt without court approval.
The need to incur new debt is common enough that the Chapter 13 trustee will typically have a procedure for review and approval that may include an application form. In some jurisdictions, it is the practice to make written application to the court for permission to incur new debt prior to confirmation, and the trustee will approve or disapprove at that time. If incurring new debt will necessitate an amendment to the proposed plan, the debtor should combine the request for permission to incur debt with a preconfirmation modification of the plan.7
One form of new debt that is clearly authorized is paying the filing fee for the Chapter 13 case itself in installments. 28 U.S.C. § 1930(a) and Bankruptcy Rule 1006 permit Chapter 13 debtors to pay the filing fee over time, including through the plan after confirmation.8 For some Chapter 13 debtors, the first step toward control of their financial lives is to borrow $185 from the U.S. Treasury.
In the event of conversion to Chapter 7, 11 U.S.C. § 348 characterizes most new debt incurred during the Chapter 13 case as if it were prepetition debt.9 Considered with the special provisions in § 1305 for the filing and allowance of postpetition claims, it is clear that Congress contemplated Chapter 13 debtors would incur new debt before and after confirmation. New debt should be avoided, but when necessary, the debtor should ask permission from the trustee before borrowing and pay the new debt through the plan.
1 See App. A. See also § 302.1 [ Postpetition Claims ] § 137.1 Postpetition Claims before BAPCPA for discussion of the allowance of postpetition claims.
2 See § 57.1 [ Operating a Chapter 13 Debtor Engaged in Business ] § 52.1 Operating a Chapter 13 Debtor Engaged in Business.
3 See §§ 1305 and 1348, discussed below in this section and in §§ 204.1 [ Providing for Postpetition Claims ] § 113.6 Providing for Postpetition Claims, 238.2 [ Effects of Confirmation on Postpetition Claims ] § 122.4 Effects of Confirmation on Postpetition Claims, 281.1 [ Postpetition Claims ] § 132.9 Postpetition Claims, 302.1 [ Postpetition Claims ] § 137.1 Postpetition Claims before BAPCPA and 314.1 [ On Postpetition Claims ] § 142.5 On Postpetition Claims.
4 See 11 U.S.C. § 1305(a)(2).
5 See 11 U.S.C. § 1328(d), discussed in § 350.1 [ Postpetition Claims ] § 158.6 Postpetition Claims; 11 U.S.C. § 1305, discussed in § 302.1 [ Postpetition Claims ] § 137.1 Postpetition Claims before BAPCPA.
7 See § 213.1 [ To Provide for Postpetition Creditors ] § 114.5 To Provide for Postpetition Creditors.
8 See §§ 36.6 [ Application to Pay Filing Fee in Installments ] § 36.29 Application to Pay Filing Fee in Installments, 38.3 [ Filing Fee and Option to Pay in Installments ] § 37.5 Filing Fee and Option to Pay in Installments and 203.2 [ Filing Fee Payment Requirement ] § 113.2 Filing Fee Payment Requirement.
9 See § 314.1 [ On Postpetition Claims ] § 142.5 On Postpetition Claims.