Protection by the Automatic Stay in a Serial Bankruptcy Filing

by | Nov 13, 2014

What is the Automatic Stay?

The “Automatic Stay” is typically the part of their bankruptcy that consumers are most interested in.

The Automatic Stay (or “Stay”) is the section of the bankruptcy code that protects the bankrupt consumer from continuing collection actions by his or her creditors.  This is the part of the bankruptcy code that requires all creditors to cease all actions intended to collect a pre-petition debt from the Debtor.  The details of this law are contained in 11 United States Code section 362.

This is the portion of the bankruptcy law that, among many other uses,

  1. halts a foreclosure sale,
  2. stops and eviction,
  3. stops an ongoing lawsuit,
  4. gives the Debtor some ‘breathing room’ and allows them to reorganize their financial affairs while under the protection of the bankruptcy court

In order for a Creditor to take action against a Debtor for debts incurred prior to the bankruptcy filing, the Creditor must come to the Court and request “Relief from Stay”, or ‘permission’ from the Court to continue a legal or collection action against the Debtor.

Violation of the Stay can result in very heavy penalties for a Creditor.  The bankruptcy courts are authorized to treat a violation of the Stay as an act in ‘contempt of court.’  I frequently assist Debtors in seeking damages and compensation from Creditors for violations of this law.

In most situations, the Stay comes into effect immediately upon the filing of the bankruptcy petition and lasts until a Debtor’s plan of reorganization is confirmed or the Debtor receives a discharge (11 USC 524).

However, if a Debtor was involved in a previous bankruptcy case  that was dismissed within a year prior to the current filing, the Stay might only last for 30 days after the filing of the case.  A Debtor can request that the Stay be extended or re-imposed, but that request must be made in a timely fashion; otherwise the Stay will expire and Creditors may then re-start their actions against the Debtor (11 USC 362(c)(3)).

What are serial filings and do I need it?

Because of the nature of my legal practice, I see many cases where I am filing a second or even a third bankruptcy for a Debtor because of the dismissal of a prior bankruptcy filing.  These are known as ‘serial filings.’

But – what happens if the prior case was not dismissed.  What if the Debtor received a normal discharge in a prior bankruptcy case within the 1-year time period?  This situation occurs when a Debtor goes through a Chapter 7 and later files for protection under Chapter 13 in an attempt to reorganize his or her remaining debts, catch up on mortgage arrears, or seek a mortgage modification.

I recently filed a Chapter 7 bankruptcy case for a Debtor.  This Debtor then came back to me several months later to file a Chapter 13 bankruptcy in an attempt to repay his mortgage arrears and save his home.

So the $700,000 question was – Does the automatic stay expire after 30 days?  If the stay expires then I need to seek a court order extending the stay to keep the Debtor’s home safe.  If the Stay does not expire, then no such order is needed.

If I make the wrong decision, then the Stay will expire 30 days after the filing and the Debtor’s house will no longer be protected from foreclosure.

As a well-known bankruptcy practitioner has told me, repeatedly, bankruptcy attorneys are “People of the Book.”  The “Book” being the bankruptcy code.

So I started my investigation there – in the Book.

According to 11 USC 362(c):

“if a single or joint case is filed by or against a debtor … and if a single or joint case of the debtor was pending within the preceding 1-year period but was dismissed…”

The key phrase here is “but was dismissed“, meaning: If a Debtor was involved a prior case within the 1-year period prior to filing the new case and that case was dismissed, then the Stay expires after 30 days.

In my Debtor’s situation, his prior Chapter was not dismissed, he received an ordinary discharge.

So my Debtor was safe, in his Chapter 13 case the Stay will continue past the 30-day period, so no Court order is necessary.

The bankruptcy code and rules are intricate, involved, and fraught with anxiety for both Debtors and their Attorneys.  If you are contemplating a second bankruptcy filing, then be sure that you are consulting with an attorney who understands the details involved.

If you would like to discuss your personal situation with an attorney who understands the details, please contact my office.  Let me analyze your personal situation and determine how best to accomplish your goals within the legal system.

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Geoff Wiggs