The Automatic Stay and The Not So Automatic Stay

Many clients come down to last few days just before a foreclosure sale. There are many reasons why things go to the last minute. Some have been trying to refinance. Others want to sell. Others are waiting for that friend or family member to save them. Often, the solution lies just around the corner but the homeowner is running out of time. Many homeowners choose to file Chapter 13 as a way to stop the sale and to make a repayment plan that will reinstate the mortgage. This invokes the automatic stay, which is effectively an injunction or restraining order against the lender. It is important primarily because it is automatic, meaning that the debtor/homeowner need not file any motion or have any court hearing to get this relief. Just filing the bankruptcy petition is enough. But not always . . .

A homeowner who has never filed bankruptcy before and who qualifies can file a Chapter 13 bankruptcy and get the stay automatically under Federal Law. This stops the sale and the mortgage company who dares to go forward with a sale after the automatic stay faces big trouble, including possibly contempt of court. Actions taken after the automatic stay are void. This stay also stops all collection activity, including calls, letters and lawsuits (with some exceptions like actions involving child and spousal support or crimes). So this is certainly a powerful weapon for a homeowner (although it is still one to avoid using if there are other alternatives available).

If a homeowner chooses bankruptcy over other options but has already filed a Chapter 13 within the last 12 months, watch out! The automatic stay law changed on October 17, 2005 when the Bankruptcy Code was butchered by Congress. Many of the changes make little sense to bankruptcy attorneys or Judges and some do nothing more than create needless extra expense and wasted time. I won’t go into the changes in this post because I could write a book on the subject. One of the major changes has to do with repetitive bankruptcy filings. This one change, which affects how the automatic stay applies in repeat Chapter 13 cases, is actually one of the few that does make sense to me.

Under the new laws, if you file a second bankruptcy case within one year of a prior filing, the automatic stay will only go into effect for thirty days, unless you can prove that the second filing was filed in good faith. To do this, a homeowner must file a motion and have a hearing in court prior to the expiration of the thirty day period. The motion can be brought against one creditor or all of them. The debtor has the burden of proof. One way to meet this burden is to show a major change in circumstances such as higher income or more stable employment. Other reasonable changes may include recovery from surgery or a serious illness that prevented the first case from succeeding. This new rule was designed to prevent people from obtaining multiple repetitive automatic stays without ever following the requirements of Chapter 13 or confirming any repayment plan. Before this new rule, some debtors would immediately re-file just after their case was dismissed. We used to jokingly call these cases Chapter 26’s or 39’s. I tried to avoid them before the law change and even more so now. There really has to be a good reason why a prior case failed and why a second will succeed.

If you file a third bankruptcy case within one year of two prior filings, the automatic stay will not go into effect at all. I generally tell clients with two prior filings within the year that my office will not file a third bankruptcy. There may be other options still available such as forebearance agreements, loss mitigation, refinancing and selling. But I do not handle triple filings within one year. For the debtor who tries to venture into this territory, they are usually asking for trouble. The Judge and the trustee will give the case the highest level of scrutiny and the debtor had better have a good reason why the first two cases failed. In my experience, there is almost an unwritten presumption that this type of debtor is playing the system and acting in bad faith – just trying to delay.

However, there is still a way to get a stay in a third filing under these circumstances. The debtor can file a motion for a stay and try to show that the third filing was made in good faith. It takes a very compelling reason to convince the court to allow the stay to be imposed on a third filing within one year. I am not sure why anyone would want to try this. It usually won’t help stop a sale because filing the motion and seeking a temporary stay takes time. If there is some compelling reason to stop the sale (i.e., the homeowner is about to close on an already approved refinancing), it may be preferable to file an order to show cause and seek a temporary restraining order (TRO) from the New York Supreme Court where the foreclosure is pending.