Good Reason to Delay Filing Bankruptcy until Now: To Avoid Losing the “Automatic Stay”
The “automatic stay” stops creditors from chasing you. A recently dismissed bankruptcy case or two can threaten this crucial benefit.
Preserving the Automatic Stay
There are many possible benefits of filing bankruptcy, but nothing helps you more quickly than the automatic stay. That’s the part of the Bankruptcy Code that immediately stops lawsuits, judgments, garnishments, repossessions, foreclosures and virtually all other ways that creditors can chase you just as soon as your bankruptcy case is filed.
In certain rare situations you could file a bankruptcy case and NOT get the protection provided by the automatic stay. Or you could get this protection but then 30 days after filing the case you could lose it. Like so much in bankruptcy law, it’s a matter of timing.
Previous Bankruptcy Case(s) Dismissed
The timing involves any prior bankruptcy filed in your name in the last one year, which was then dismissed (closed before it was completed). Careful, because this might apply to you even if you don’t think it does.
The Possibility that You Filed Bankruptcy Earlier
Don’t assume that you have not filed a recent bankruptcy case without thinking it over very carefully. It’s not unheard of for someone to have a case filed on her or her behalf and have it dismissed without even knowing that it had happened, or simply forgetting about it. For example, a person may file a bankruptcy without an attorney, not follow through for whatever reason (usually by failing to pay the filing fee, not submitting documents on time, or not going to a meeting), and the court dismisses the case. Or a person may hire an attorney, and because of some miscommunication the case gets filed but then dismissed for lack of follow-up. In any event, months later the person either never knew or forgot that a bankruptcy case got filed and dismissed.
The Two Rules
Rule #1: The automatic stay would go into effect at the time that your bankruptcy case is filed, but this benefit would expire after 30 days if within the previous 1-year period you had filed a bankruptcy case which then got dismissed.
Rule #2: The automatic stay would not go into effect at all at the time that your bankruptcy case is filed, if within the previous 1-year period you had filed two or more bankruptcy cases which then got dismissed.
In both of these situations, after your new case is filed the automatic stay could be preserved if you can show the bankruptcy court that you meet certain conditions. These conditions pertain to the reasons why the previous case(s) was (were) dismissed and why the present case is being filed.
Avoiding this Risk with Good Timing
Although under both rules you may be able to explain your way into preserving the automatic stay, sometimes it’s easier just to wait to file long enough to avoid the problem altogether. Both rules have a strict one-year look-back period. So if any prior bankruptcy case was dismissed even just a day longer than a year ago, these rules do not go into effect and there is no risk to the automatic stay in your new case.
So in the case of the above Rule #1 (with the one prior bankruptcy case dismissal within a year), it may well make sense to wait to file your new case until past a year after the dismissal date of the prior case.
And in the case of the above Rule #2 (with two or more prior bankruptcy case dismissals within a year), it may well make sense to wait until your new case is past a year after the latest of the prior case’s dismissal dates. Or if you can’t wait that long because of pressure from creditors, it may still make sense to wait to file your new case until only one of the prior case’s dismissal dates was within a year, which would put you into a Rule #1 situation. That’s often better because then at least the automatic stay goes right into effect at the filing of your new case, and you have 30 days to show the court that the new case is appropriate, and thereby preserve the automatic stay throughout your new case.