Either be prepared to justify why you should be allowed to file a second bankruptcy case within a year, or maybe instead wait out the year.
The Automatic Stay
One of the most important and immediate benefits of filing bankruptcy is the automatic stay. That’s the federal law that stops creditors from chasing you and your assets immediately when your bankruptcy case is filed. It also usually keeps them from doing so as long as your case is open. You certainly don’t want to miss out on this tremendously important benefit of bankruptcy, especially if you lose it unexpectedly just when you are counting on it.
Losing the Automatic Stay
In rare circumstances, you could file a bankruptcy case and not get this protection. Or get it but then lose it without warning 30 days later.
These could happen if you are now considering filing a bankruptcy case and had a prior bankruptcy, or more than one, filed in your name within the last 365 days, which was/were subsequently dismissed.
Careful, because this could have happened without you being fully aware of it then or without you remembering it now.
This can happen in two scenarios. We’ll cover one today, and the other in the next blog post.
Avoid Losing the Automatic Stay 30 Days After Filing
Assume that within the last 365 days you had filed a bankruptcy case, which for some reason had been dismissed (thrown out and closed). If now, months later, you file a new case, the automatic stay would immediately go into effect as usual, BUT would automatically expire 30 days later unless by then you and your attorney would show the court that you meet certain conditions. Those conditions involve justifying why the previous case was dismissed and why the present case is being filed.
The Example
Let’s illustrate how this might work in real life with an example.
Kate was sued by a collection agency a year ago. Afraid of getting her wages garnished, she went to the bankruptcy court and, without seeing an attorney impulsively filed a “skeleton” Chapter 7 “straight bankruptcy” case on her own—completing just enough paperwork to file the case. Later the same day, before the collection agency was informed of her filing, Kate received a phone call from the agency offering quite generous settlement terms, consisting of very small monthly payments, which she accepted. She was glad that she didn’t need a bankruptcy case after all.
Kate’s bankruptcy case was dismissed a few weeks later after Kate missed a deadline to file the remaining bankruptcy documents. In her mind she understood that because she never followed through and never received any benefits of filing bankruptcy, she hadn’t really filed a bankruptcy case.
Now 340 days after she filed that “skeleton” Chapter 7 case, more of Kate’s creditors have caught up with her, including the Internal Revenue Service chasing her for about $20,000 owed for the last three years of income taxes. Since the IRS threatened to garnish her wages, Kate decides to see an attorney, who recommends she file a Chapter 13 case. When the attorney asks her whether she’s filed any other bankruptcy cases in the last year, she says no. She hardly remembers going to the bankruptcy court in a near- panic nearly a year ago, and she believes what she did didn’t count as a bankruptcy filing.
Fortunately Kate’s attorney’s legal assistant, while preparing the bankruptcy filing documents, found in Kate’s paperwork a clue about her prior bankruptcy filing. Following up on this, the legal assistant found out the date of that short-lived Chapter 7 bankruptcy case and informs Kate’s attorney, who explains the situation to Kate.
She is told she has two options: 1) wait to file the new Chapter 13 case until after 365 days passes since the filing of the earlier Chapter 7 case; or 2) file the new case without waiting for the 365 days to pass, and then immediately thereafter file a motion with the court asking to retain the automatic stay.
Although Kate is advised that because of her circumstances she would likely win such a motion, she is also advised that it would be safer to wait for the 365 days to pass to avoid a risk that the motion would not go as well as expected. After being assured that the attorney could prevent her from being harmed by the IRS during the month or so while waiting for the last of the 365 days to pass, Kate decided to file after that time had passed.
So she does exactly that. In doing so, she avoids having to justify to the bankruptcy judge why she was filing two bankruptcies in one year. More importantly, she avoids the shock of unexpectedly losing the protection of the automatic stay 30 days after filing her case.