Making Sense of Bankruptcy: Don’t Lose the Crucial “Automatic Stay” through Multiple Bankruptcy Filings
July 6, 2015
A law designed to stop the “serial filing” of bankruptcy cases could take from you one of your most important weapons against creditors.
Here’s the sentence that we’re exploring today:
When filing bankruptcy there is almost no benefit more important than the “automatic stay” so the effect of losing it can be extremely harmful, and that can happen if you’ve had a prior bankruptcy case or cases dismissed within the last year, which could possibly happen even without you knowing.
The Crucial Automatic Stay
The “automatic stay” is the federal law which stops creditors from collecting from you and your assets from the moment your bankruptcy case is filed and usually prevents them doing so throughout your case. It’s a tremendously important benefit. The automatic stay stops ongoing creditor actions that take your income, such as a wage garnishment, or take your possessions and property, such as a vehicle repossession or home foreclosure. And the automatic stay prevents new collection actions such as lawsuits and the recording of tax liens.
The automatic stay is crucial to the bankruptcy process, giving you both immediate and extended relief so that you can deal with your creditors through bankruptcy. This is a benefit of bankruptcy you certainly don’t want to lose out on.
The Effect of Losing the Automatic Stay
To drive this point home, be aware of the effect of not having the automatic stay, first, in a Chapter 7 “straight bankruptcy” case. Even after you filed a Chapter 7 bankruptcy case all your creditors could continue pursuing you until those debts that could be written off were indeed written off. As for any debts that could not be written off, you would not have a break from the collections to negotiate terms of payment.
And it would be even worse in a Chapter 13 “adjustment of debts” case. Usually here you pay creditors a portion (often only a small portion) of what you owe them over a 3-to-5-year period. That would not work at all without the automatic stay making creditors stop collection actions and accept the terms of the payment plan.
In most cases losing the automatic stay would make filing bankruptcy case ineffective.
A Prior Bankruptcy within 1 Year
If within the one-year period before the filing date of the new case you were in a prior bankruptcy case which was then “dismissed” (thrown out and/or closed before completion) the automatic stay could terminate in your new case. The automatic stay would go into effect as usual at the filing of your new case, but would terminate 30 days later unless you and your attorney persuaded the bankruptcy judge that your new case was filed “in good faith,” not as an abuse of the system. If successful, the automatic stay would be extended and remain in effect throughout the life of the case.
More than One Prior Bankruptcy within 1 Year
If within the one-year period before the filing date of the new case you were in more than one prior bankruptcy case, which were “dismissed,” your new case would begin without the automatic stay. But then the automatic stay would go into effect if within 30 days after filing you and your attorney persuaded the bankruptcy judge that your new case was filed “in good faith,” not as an abuse of the system. If successful, the automatic stay would be imposed and generally remain in effect throughout the remaining life of the case.
Prior Bankruptcy without Your Knowledge
This loss of the automatic stay is only a concern if you had a pending bankruptcy case which was dismissed during that 1-year period before the filing of your new case. If you are certain there was no such prior case, don’t worry about this.
However, before you conclude that you have not filed a bankruptcy case within the last year, think about it again carefully. It happens way more than you think that a bankruptcy is filed for somebody and get dismissed without the person understanding what happened or remembering it a year later.
This usually happens one of two ways. First, a person files a bankruptcy without an attorney, for whatever reason does not follow through with additional documents or by attending a hearing, and so the court dismisses the case. Second, a person hires an attorney, signs some papers, and the case gets filed by the attorney, without the person fully understanding because of some miscommunication, and then the case gets dismissed for lack of follow-up. In either situation many months later the person either doesn’t know or has forgotten that a case got filed on his or her behalf and got dismissed.
Both these situations happen more with married couples, especially if one spouse is less involved in their finances, they don’t communicate well, and/or are considering divorce. If a joint case was filed on behalf of both spouses, and was then dismissed without one spouse fully aware what happened, and then that spouse tries to file his or her own bankruptcy case within a year, perhaps in the midst of a divorce, he or she may be very surprised to learn about the prior bankruptcy case and the resulting loss of the automatic stay in his or her new case.
So if you are contemplating filing bankruptcy consider very carefully whether there’s any way that within the last year you filed an earlier case, and then tell your attorney about it. You need legal advice about whether you had a prior case that would you now risk losing the automatic stay in your present case. And if so, your attorney needs to help you establish that you filed your new case in “good faith.”