Don’t get tripped up in a rule designed to prevent bankruptcy abuse.
Don’t Lose the Precious “Automatic Stay”
One of the most important benefits you get from filing bankruptcy is protection from your creditors. That legal protection is called the “automatic stay.” It prohibits creditors from pursuing you, your income, or your assets.
The automatic stay usually goes into effect the moment your bankruptcy case is filed, and lasts throughout your case. But there are rare situations in which this protection does not go into effect when you file bankruptcy. Or it goes into effect but then automatically expires after 30 days. It would certainly not be good to file bankruptcy but still have your creditors be able to pursue you.
This situation is rare but considering the bad consequences, be sure it doesn’t happen to you.
Congress created some rules to deal with “serial filers”: people filing bankruptcy multiple times, each time to stop a creditor’s action—such as a home foreclosure—but then dismissing (closing) the case a month or two later, only to refile as soon as the creditor restarts the collection action. This was seen to be an abuse of bankruptcy.
The rules deal with two situations.
The first involves filing a new bankruptcy case after having filed ONE prior one during the last year. If that prior case was dismissed, the automatic stay still does go into effect when you file your case. But the automatic stay protection AUTOMATICALLY EXPIRES 30 days after your case filing. That is, it expires unless before then you and your lawyer convince a bankruptcy judge that you meet certain conditions. If you do then the automatic stay protection continues as usual. See Section 362(c)(3) of the Bankruptcy Code.
The second situation is similar but involves the filing of TWO OR MORE prior bankruptcy cases during the last year. If those two cases were dismissed, then the automatic stay does NOT GO INTO EFFECT AT ALL when you file the new case. In this situation the automatic stay can go into effect soon after the case is filed. You and your bankruptcy lawyer must, within 30 days of filing the case, convince the judge that you meet certain conditions so that the automatic stay does get imposed. See Section 362(c)(4).
In both situations you need to show why your prior case(s) was (were) dismissed and justify filing the new case. You need to show that the new case is being filed “in good faith.” (Further complicated details for meeting this “good faith” standard are beyond the scope of this blog post.)
Prior Dismissed Cases Are More Common than Expected
People get unexpectedly tripped up on these rules more often than you might think. For example:
1) Someone files bankruptcy without a lawyer, gets overwhelmed and doesn’t follow through, so the case gets dismissed. The person may think that doesn’t count as a bankruptcy filing. Or may simply forget about it when later files a new case.
2) A person sees a lawyer, signs some papers, and the bankruptcy case gets filed at court. The case gets dismissed a month or two later because he doesn’t follow through or stay in touch with the lawyer. Months later, when trying to file a new case he doesn’t realize or forgets that the prior case was filed and dismissed.
3) A person’s Chapter 13 case is dismissed when her income is reduced so she can’t make the plan payments. Later, when creditors start pressuring her again she files a Chapter 7 case. Not realizing that her previous Chapter 13 case was dismissed, the automatic stay expires after 30 days.
Prevent These Problems
Before seeing a lawyer to discuss filing bankruptcy
1) carefully consider whether you might have filed a prior bankruptcy case within the last year, and
2) if there’s a chance that you did, tell your lawyer immediately.
If you had filed an earlier case, there’s a good chance that your lawyer would be able to persuade the bankruptcy court to keep or impose the automatic stay. But that’s much more likely to happen if you tell him or her about it in advance.