WHAT'S THE "AUTOMATIC STAY" AND WHY IT'S SO IMPORTANT
The "automatic stay" stops creditors from pursuing you and your assets as of the moment your bankruptcy case is filed, and usually prevents them doing so as long as your case is active.
This is a tremendously important feature of bankruptcy. The automatic stay gives you immediate relief from virtually all the pressures that creditors can bring to bear. It stops ongoing creditor actions that are now hurting your income such as a wage garnishment. It stops an about-to-happen vehicle repossession or home foreclosure. It stops creditor phone calls and collections letters.
The automatic stay, while in effect, also gives continuous relief by preventing threats to your income and assets. It stops a lawsuit turning into a judgment and garnishment. It prevents the filing of most lawsuits and the recording of liens, including tax liens.
The automatic stay is integral to the bankruptcy process, giving you immediate and extended relief from your creditors so that you can deal with them as the law allows in bankruptcy. This is a benefit of bankruptcy you certainly don't want to lose out on.
WHAT HAPPENS IF YOU LOSE THE AUTOMATIC STAY?
The automatic stay is just about most important power you have over your creditors in bankruptcy. Without it, in a Chapter 7 "straight bankruptcy" case all creditors would be able to continue pursuing you and your assets until those debts that could be discharged (written off) would in fact be discharged. You would not have time or leverage to negotiate terms on debts that would not be discharged (such as recent income taxes).
And a Chapter 13 "adjustment of debts," in which you pay creditors usually a portion of what you owe them over a 3-to-5-year period (and sometimes only a small portion), would not work at all without the automatic stay forcing creditors to sit tight and accept the terms of the payment plan.
The automatic stay is essential to just about every bankruptcy case. Losing it, especially unexpectedly, would likely make a bankruptcy case a big waste of time, effort, and money.
HOW CAN YOU LOSE THE AUTOMATIC STAY?
First, any creditor can file a motion in the bankruptcy court asking for "relief from the automatic stay," essentially asking that the automatic stay no longer apply to it and its debt and/or collateral. These are most often filed by secured creditors—such as vehicle lenders and home mortgage holders—in order to get court permission to get possession of its collateral. The court will give "relief from stay" to a creditor only under certain circumstances laid out in the law.
Second, you can automatically lose the automatic stay in your bankruptcy case as applicable to ALL of your creditors by having filed a prior case within a year of the one you are now filing, if that prior case was dismissed. This second way of losing out on the automatic stay is the topic of this blog post.
WHAT THE RULE ABOUT LOSING THE AUTOMATIC STAY BECAUSE OF A PRIOR BANKRUPTCY?
There are actually two related rules:
- If within the 1-year period before the filing of your present bankruptcy case you had an active prior bankruptcy case, which was dismissed, the automatic stay would go into effect at the filing of your new case but would automatically expire after 30 days, unless certain conditions were met. Before that 30 days passes the automatic stay would continue in effect if you convince the bankruptcy court that the present case was filed "in good faith."
- If within the 1-year period before the filing of your present bankruptcy case you had two or more active prior bankruptcy cases which were dismissed, the automatic stay would not go into effect at all at the filing of your new case. But the automatic stay could be imposed by the court if within 30 days after the filing of the new case you file a motion and convince the bankruptcy court that the new case was filed "in good faith."
We will discuss what "good faith" means shortly.
WHAT'S THE POINT OF THIS LAW?
This law was intended to prevent so-called serial bankruptcy filings, considered by many as an abusive practice. Before the law went into effect some people would file bankruptcy cases one after another, using the automatic stay of each new case to repeatedly delay a foreclosure or some other collection action. When, for example, a foreclosure was about to take place the debtor would file a bankruptcy case and stop the foreclosure, but then not complete and file the bankruptcy document or not attend a hearing so that the case would get dismissed by the court. And then just before the next foreclosure was to occur the debtor would file another bankruptcy case to repeat the cycle.
The new law prevents this practice. But it goes too far, potentially seriously penalizing debtors who do nothing of this sort. The law does provide an opportunity for debtors to explain why they filed more than one bankruptcy and how their present case was filed "in good faith."
SO THIS IS A RISK ONLY IF YOU'VE BEEN IN A PRIOR BANKRUPTCY WITHIN THE PRIOR YEAR, AND IT WAS DISMISSED?
That's right. But it's not the FILING DATE of the prior case(s) that count(s), rather the dismissal date. The Bankruptcy Code refers to the prior case "pending within the preceding 1-year period," regardless when that case was filed. Also keep in mind that this does not apply if you obtained a discharge in your prior bankruptcy case, but only if the prior case was dismissed within 1-year.
So, you don't have to worry about this rule if you're thinking about filing bankruptcy and are certain that you were not in another bankruptcy case within the last year.
Also you don't need to worry about this rule even if you were in an earlier bankruptcy within a year and it was not dismissed. For example, if you filed a Chapter 7 case and completed it so there was no dismissal, and are now considering a Chapter 13 case to deal with debts that weren't discharged in the Chapter 7 case, this rule does not apply because that prior Chapter 7 case wasn't dismissed.
WHAT IF YOU'RE NOT SURE IF A PRIOR BANKRUPTCY WAS FILED IN YOUR NAME?
Before you assume that you have not filed a bankruptcy case within the last year, think carefully. Sometimes people file a case and have it dismissed without even knowing or remembering it!
Although this may seem unlikely it can happen, usually in one of two ways.
First, a person files a bankruptcy without an attorney, for whatever reason does not follow through, and the court dismisses the case.
Second, a person hires an attorney, signs some papers, and the case gets filed, without the person even realizing it because of some miscommunication, and then gets dismissed for lack of follow-up. In either situation, many months later the person either doesn't realize or has forgotten that a case got filed and dismissed.
These both happen more with married couples, especially if one spouse is not fully involved in their finances, there isn't good communication among them, and/or they are in the midst of divorce. If a joint case was filed for both spouses, and is dismissed without one spouse fully aware what happened, and then that spouse tries to file his or her own bankruptcy case months later, perhaps during or after a divorce, he or she may be rudely surprised to learn about the prior bankruptcy case and the loss of the automatic stay in the new case.
WHAT CAN YOU DO IF YOU HAVE ONE OR TWO DISMISSED BANKRUPTCIES AND NEED TO FILE AGAIN?
First, if you can, delay filing the new bankruptcy case until it's been more than 1 year since the prior case was dismissed. That would avoid the problem altogether.
Second, if you can't delay filing because of some urgency, have your attorney file a motion to either extend the automatic stay (beyond the initial 30 days) if you had one prior dismissed case within 1 year, or to impose the automatic stay if you had two or more prior dismissed cases.
Either way you would have to convince the bankruptcy judge that the extension or imposition of the automatic stay would be "in good faith as to the creditors to be stayed."
HOW DO YOU SHOW "GOOD FAITH AS TO THE CREDITORS TO BE STAYED"?
In general you need to show that in your prior bankruptcy filing(s) and your new one you used/are using the bankruptcy laws appropriately, and not to harass and delay creditors in the ways that serial filings would. You would explain the circumstances of the prior filings, why the case(s) was (were) dismissed, and the legitimate reason(s) for filing the new case, including the intent to proceed with the new case to its completion.
But the Bankruptcy Code adds an extra challenge for debtors whose prior cases were dismissed under certain circumstances, and does so essentially by increasing the burden of proof in proving good faith. Normally the bankruptcy judge would have to be convinced "by preponderance of the evidence" of a debtor's good faith. But if the prior case(s) was (were) dismissed for certain reasons, the new case will be considered "presumptively filed not in good faith (but such presumption may be rebutted by clear and convincing to the contrary)." This higher "clear and convincing evidence" burden of proof applies to prior case dismissals that happened for the following reasons, which cover many of the reasons that cases can get dismissed:
- The debtor failed to "file or amend the petition or other documents as required by [the Bankruptcy Code] or the court without substantial excuse (but mere inadvertence or negligence shall not be a substantial excuse unless the dismissal was caused by the negligence of the debtor's attorney)."
- The debtor failed to "provide adequate protection [i. e., payments to secured creditors] as ordered by the court."
- The debtor failed to "perform the terms of a plan confirmed [approved and ordered] by the court."
- "[T]here has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous case under chapter 7, 11, or 13."
- There isn't reason to think that the new case will successful result in either a Chapter 7 discharge or a Chapter 13 plan approved by the court and "fully performed" by the debtor.
- If in the prior case a creditor filed a motion for relief from stay, and at dismissal "that action was still pending or had been resolved by terminating, conditioning, or limiting the stay."
Practically speaking it's difficult to measure how much harder it would be to convince a bankruptcy judge that a new case is being filed in good faith by "clear and convincing evidence"—as required in all these kinds of dismissals—instead of only by the usual "preponderance of the evidence." Given the vagueness of the good faith standard, it would seem that most of the time a judge would find a debtor's good faith or lack of it based on the overall fairness of the situation—the circumstances in which the prior case(s) was (were) filed and the present one is being filed—and would do so irrespective of the relatively subtle differences in these two standards of proof.
SO WHAT'S THE BOTTOM LINE HERE?
Avoid the drastic consequences of not having or of losing the automatic stay by 1) considering very carefully whether there's any way that within the last year you filed another bankruptcy case (including with your spouse or now ex-spouse), and then 2) informing your attorney of any possibility that you did.
If you did have a prior case or two filed and dismissed, there's usually a good chance that the bankruptcy court could be persuaded to impose or extend the automatic stay. But that would be much harder to pull off unless your attorney knows about the issue in advance and can guide you accordingly.