Applicability of the Automatic Stay to Serial Chapter 13 Petition Filers

Ordinarily, when a debtor files a chapter 13 bankruptcy petition, the automatic stay is triggered immediately. The stay prohibits lenders from pursuing any claim against the debtor unless they seek and are provided relief from the automatic stay. However, lenders should be aware of certain scenarios where the automatic stay may expire without the need to file a motion for relief from stay.

Section 362(c)(3) of the Bankruptcy Code (the “Code”) limits the duration of the automatic stay in situations where an individual had a bankruptcy case pending and dismissed within one year of filing a new chapter 13 bankruptcy case. In these situations, the automatic stay applies until the 30th day after the second bankruptcy filing date. Debtors can try to extend the automatic stay by filing a motion for continuation of the automatic stay. However, a hearing on such a motion must be completed before the 30-day time period expires.

Courts will only extend the 30-day stay period if the debtor can demonstrate that the second case was filed in good faith. Section 362(c)(3)(C) provides for situations where a bad faith filing is presumed. This presumption applies if (i) the debtor has filed more than one case within the year preceding the filing of the current case; (ii) a previous case filed by the debtor was dismissed within the one year period preceding the filing of the current case and the debtor failed to (a) file or amend the petition or other documents as required by the Code or the court without substantial excuse, or (b) provide adequate protection as required by the bankruptcy court, or (c) perform the terms of the confirmed plan, or (iii) there hasn’t been a substantial change in the debtor’s financial or personal affairs since the dismissal of the most recent case.

Lenders should be aware that a debtor who fails to file schedules in the original bankruptcy case will have a difficult time proving a substantial change in financial affairs. If a debtor fails to file schedules, there is no way for a court to determine how the debtor’s current financial condition compares to its financial condition when it filed its original case. Thus, lenders should be quick to raise an objection based on this bad faith presumption when a debtor has failed to file schedules in its original bankruptcy case.

Topics:  Automatic Stay, Chapter 13, Debtors, Lenders, Motions to Stay Proceedings

Published In: Bankruptcy Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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