Refinancing while in Chapter 13

Court permission is required before taking on new debt in a chapter 13 bankruptcy. The restriction is also often expressly set forth in the body of the plan or the order approving it.

Procedurally

Once filed, it will take about 3-4 weeks for the motion to be heard by the bankruptcy judge. Once the judge hears the motion, and assuming nobody opposes it, an order approving the refinance is usually issued within a week or so.

You are allowed to close on your refinance only after the judge has approved the motion.

Form to Request Refi - Central District California West Legal Forms, Motion to Incur New Debt

Statutory Cites

Business Debt

11 U.S.C.A. §364 requires leave of court for a trustee to incur any debt other than unsecured debt in the ordinary course of business. By virtue of section 1304, the provisions of section 364 apply also to a Chapter 13 debtor.

Personal Debt

The statutory prohibition of incurring business debt under section 364 doesn't apply to incurring personal debt. So you must first check for a restriction on incurring new debt in the chapter 13 proceedings. Even absent that, a Chapter 13 debtor's postconfirmation credit transactions are subject to scrutiny by trustee and bankruptcy court. Bankr.Code, 11 U.S.C.A. § 1305(c) and the court may block payment of those debts.

A necessary implication of the language of section 1305(c) seems to be that a Chapter 13 debtor must obtain “prior approval by the trustee” in order to incur a new debt “for property or services necessary for the debtor's performance under the plan.” (See paragraph 6 of the above form.) Section 1305 permits inclusion in Chapter 13 plan payments of postpetition obligations for (1) taxes and (2) consumer debts for necessary items, under the conditions described therein. See also 11 U.S.C.A. §§ 363, 364, 1303 and 1304.

Cases

• While a Chapter 13 debtor not in business has ability to incur postpetition debt without court authorization, approval by trustee is required if debtor intends to make payments to postpetition creditor under his plan.  In re Loden, Bkrtcy.W.D.Ark.2017, 572 B.R. 211.  Bankruptcy Key Number 2832.1;  Bankruptcy Key Number 3703

• Even assuming that claim by Chapter 13 debtor's attorney for the filing fee that she paid postpetition on debtor's behalf was in nature of consumer debt “for property or services necessary for the debtor's performance under the plan,” attorney's failure to seek trustee's approval prior to advancing the filing fee to debtor prevented attorney from asserting claim for repayment of filing fee under bankruptcy statute governing the filing and allowance of postpetition claims; attorney either knew or should have known of need to seek trustee's approval.  In re Frazier, Bkrtcy.S.D.Ga.2017, 569 B.R. 361.  Bankruptcy Key Number 2832.1

• Claim asserted by Chapter 13 debtor's family friends, for reimbursement of sums which they had paid postpetition to repair debtor's home so that it could be sold for sum sufficient to satisfy creditors' claims, was allowable on priority basis as postpetition claim for extension of consumer credit, even though family friends did not seek trustee's or bankruptcy court's approval prior to extending this postpetition credit to debtor; while one of these friends was real estate agent, neither he nor other friend were experienced in bankruptcy matters and did not know that debtor was prohibited from incurring debt without such approval.  In re Chaney, Bkrtcy.N.D.Ga.2004, 308 B.R. 588.  Bankruptcy Key Number 3036

• It was not practicable for Chapter 13 debtors to obtain prior approval of trustee before incurring postpetition debts, for purposes of Bankruptcy Code section governing filing and allowance of postpetition claims, where, although claimant-deferred presentment service providers should have known of pendency of debtors' bankruptcy cases, debtor testified that she did not believe that transaction with claimant was loan and, thus, did not believe that approval of trustee was required, and claimants also took position that their services were not loans.  In re Bagby, Bkrtcy.W.D.Tenn.1998, 218 B.R. 878.  Bankruptcy Key Number 2832.1

• Chapter 13 debtor's postconfirmation credit transactions are subject to scrutiny by trustee and bankruptcy court.  In re Brown, Bkrtcy.S.D.Ohio 1994, 170 B.R. 362.  Bankruptcy Key Number 3035.1;  Bankruptcy Key Number 3703

• Postpetition claim for property or services necessary for Chapter 13 debtor's performance under plan shall be disallowed if claimant should have known prior approval by trustee of debtor's incurring such obligation was practicable and was not obtained, even if debt could also be classified as administrative expense.  In re Clayburn, Bkrtcy.N.D.Ala.1990, 112 B.R. 434.  Bankruptcy Key Number 2832.1

• If bankruptcy claimant extends credit to debtor under this chapter without required approval of trustee, claim will be disallowed as postpetition claim.  In re Thornton, Bkrtcy.W.D.Va.1982, 21 B.R. 462.  Bankruptcy Key Number 2832.1

Refinancing to Pay off Plan

The rules above also apply to taking on new debt to pay off all amounts due under the chapter 13 plan and to conclude the bankruptcy. if "consumer debt" is to be incurred, written approval of the trustee is required.