Don’t jeopardize an indispensable benefit of filing bankruptcy–immediate protection from your creditors.
Losing the Entire “Automatic Stay”
We’ve been going through a series of blog posts about the different important twists and turns of the “automatic stay.” That’s the protection from creditor collections that goes into effect the moment you and your bankruptcy lawyer file your case.
A debtor can lose this protection as to one creditor if the creditor asks for and gets “relief from stay.” However, in rare circumstances debtors can lose the automatic stay protection as to ALL of their creditors, all at once. We cover this second situation in today’s blog post and the next one.
“Relief from Stay” as to One Debt
A couple of weeks ago we got specifically into the circumstances where a creditor could ask for “relief from stay.” If a creditor is successful in such an attempt, the automatic stay no longer applies to it. Or at least it doesn’t apply in some respect.
For example, a vehicle loan creditor may get permission to repossess a vehicle if you don’t make payments. That permission would very likely not allow the creditor to do anything except repossess the vehicle. For instance, the creditor could not sue you or otherwise try to collect on any remaining balance on the loan.
Furthermore, as just mentioned, the “relief from stay” that a creditor would receive would apply only to it. That limited permission to chase you or your asset(s) would not apply to the rest of your creditors.
But imagine if instead ALL of your creditors could pursue you all at once, in spite of you having filed bankruptcy!
Bankruptcy Is Ineffective without the Automatic Stay
Let’s demonstrate how bankruptcy does work without the automatic stay, first, in a Chapter 7 “straight bankruptcy” case. In most consumer Chapter 7 cases all or most of the debts are “discharged”—legally written off—about 3 months after you file the case. But without the automatic stay the creditors could try to force you to pay in the meantime. That would be a mess.
There may also be debts that Chapter 7 does not discharge, such as child support. Or you may have other debts you don’t want to discharge, such as a vehicle loan, to keep the vehicle. If all your creditors could continue pressuring you to pay, you would not be able to pay these more important debts.
In a Chapter 13 “adjustment of debts” case it would only be worse. In most of these cases you pay creditors only a portion of what you owe them. Often you pay most creditors only a small portion of what you owe, and do so over a 3-to-5-year period. The discharge of debts only happens at the end of that period. This arrangement would simply not work at all without the automatic stay making creditors stop their collections and accept the terms of the payment plan.
Without the automatic stay most bankruptcy cases would not accomplish what you need.
One Prior Dismissed Bankruptcy within 1 Year
So how could you lose the automatic stay as to all of your creditors?
- during the one-year period before filing a new case you were in a prior bankruptcy case; and
- that prior case was “dismissed” (thrown out and/or closed before it was completed.
Then the automatic stay could altogether terminate 30 days after filing your new case. See Section 362(c)(3) of the U.S. Bankruptcy Code.
The automatic stay would go into effect as usual at the filing of your new case. But then its protection would automatically end 30 days later. It would only not end if in the meantime you and your bankruptcy lawyer persuaded the bankruptcy judge that your new case was filed “in good faith.”
It takes stronger evidence in certain circumstances to show the required “good faith.” It takes “clear and convincing” evidence to show the necessary “good faith” under the following circumstances:
- if the prior case’s dismissal resulted from your failing to:
- file required documents at court
- “provide adequate protection as ordered by the court” (See our blog post of Oct. 17, 2016 about “Adequate Protection”)
- “perform the terms” of a court-approved payment plan
- if “there has not been a substantial change in [your] financial or personal affairs” “or any other reason to conclude” that the new case will be successful
If you can produce the necessary evidence that the new case was filed in “good faith,” then the automatic stay extends beyond the 30 days and remains in effect throughout the bankruptcy case.
So if you are considering bankruptcy, think carefully about whether you might have filed an earlier case recently. If there’s any chance you (or a spouse) filed an earlier bankruptcy case, tell your lawyer about it. You’ll get the legal advice you need about whether you really had a prior case that could cause problems now. If so, your lawyer will to help you establish that you filed your new case in “good faith.”