Can Bankrupts Borrow?

Getting a loan when you're in bankruptcy depends on which chapter you file under. Here's a review of the rules

Q: I own a small sign shop and I am currently under a bankruptcy order. I have two more months before the court will discharge it. Can I get a secured loan to purchase equipment now, or do I have to wait for the bankruptcy to be dismissed?


It's not clear from your question whether the bankruptcy case involves you personally, or whether it involves you and your company. Since it's also not clear whether the bankruptcy was filed under Chapter 7, 11, or 13 of the bankruptcy code, let's go through all the rules.

If you're dealing with a personal Chapter 7 bankrupcty case, there should be no legal prohibition against your obtaining credit, says Donald F. King, a bankruptcy expert at the law firm of Odin, Feldman & Pittleman, in Fairfax, Va. Filing for bankruptcy protection under Chapter 7 gives the filer a "fresh start" in terms of getting new loans and making purchases without court intervention. However, "from a practical perspective, finding a willing lender while you are in bankruptcy could prove problematic," King notes. "On the other hand, if the loan is secured by the purchased equipment, the lender is more likely to take the risk."

The rules are different, however, if you or your company are involved in a Chapter 11 or Chapter 13 bankruptcy. In that case, you would not be authorized to obtain credit without prior court approval, says M. Jonathan Hayes, a bankruptcy lawyer based in Woodland Hills, Ca. You could file a motion to approve the new loan and purchase, or wait until the case is dismissed, he says. "It is not difficult to obtain court approval if the loan is necessary to the business operations. You should speak with your attorney about this," King says.

For more information on bankruptcy and the rules that accompany the various filings, look over the consumer education pages and the FAQs of the American Bankruptcy Institute's Web site. Good luck!

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