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
Dear 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 period.
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!