The Automatic Stay and Chapter 13 Serial Filers

The Automatic Stay afforded to repeat (or serial) Chapter 13 filers has long been a thorn in the side of the mortgage industry, as each successive Chapter 13 filing resurrects the Automatic Stay and prevents the mortgage lender from completing their foreclosure. Bankruptcy Code Sections 362 (c)(3)&(4) were intended by Congress to limit the duration of the Automatic Stay afforded to serial filers in certain circumstances. Section 362 (c)(3) provides that if a debtor had one prior bankruptcy case dismissed in the preceding year, the Automatic Stay will terminate within 30 days after filing of the later (ie., second) case unless the debtor can convince the Court to Extend the Automatic Stay. For the Automatic Stay to be extended beyond said 30 days, the statute requires the debtor, during said time frame, to (1) file a motion to Extend the Automatic Stay, (2) have the hearing on said motion held before the Court, and (3) convince the Court that there has been a substantial change in circumstances and good reason to believe that the debtor will carry the current case through to discharge. Section 362 (c)(4) provides that if a debtor had two or more bankruptcy cases dismissed in the preceding year, the Automatic Stay does not even go into effect upon the filing of the later ( ie., third) case. For the Automatic Stay to be imposed in this situation the debtor must file a motion within 30 days of the later filing seeking to Impose the Automatic Stay and convince the Court that the latest filing is made in good faith. However, the statutory language employed by Congress to accomplish its intended goal has proven to be inapplicable to many serial filers, which is good news for debtors.

The Automatic Stay created by Section 362 (a) is probably the most important protection afforded to a debtor in bankruptcy because, immediately upon filing, it stops creditors from taking most actions against:

1. The Debtor, which would include collection letters and dunning phone calls:
2. Property of the Debtor, which would include ERISA pensions, leased property, etc.; and
3. Property of the Estate, which would include debtor’s house and most pre-petition assets.

In general, the duration of the Automatic Stay is determined by the nature of the action being taken by the creditor; specifically, is it against (1) the Debtor, (2) Property of the Debtor, or (3) Property of the Estate. The Automatic Stay continues concerning Property of the Estate, pursuant to Section 362 (c)(1), “until such property is no longer property of the estate”. The Automatic Stay continues concerning the Debtor and Property of the Debtor, pursuant to Section 362 (c)(2), “until the earliest of—(A) the time the case is closed; (B) the time the case is dismissed; or (3)…the time a discharge is granted or denied”.

In the typical first Chapter 13 filing designed to “save the house”, the Automatic Stay goes in to effect immediately upon filing, at which time the house is deemed to be Property of the Estate. Pursuant to Section 362 (c)(1), the house remains Property of the Estate until the Chapter 13 Plan is confirmed by the Court. Section 1327 (b) establishes that “confirmation of a plan vests all of the property of the estate in the debtor”. Accordingly, once the Chapter 13 Plan is confirmed, the house is deemed to be Property of the Debtor, with the Automatic Stay then remaining in effect pursuant to Section 362 (c)(2).

If a debtor’s first Chapter 13 case is dismissed and the debtor files a second Chapter 13 within one year of said dismissal, Congress intended for the provisions of Section 362 (c)(3) to come to the secured creditor’s rescue. However, if a debtor in this situation forgets to get Extend the Automatic Stay, the statute provides only that the Automatic Stay “shall terminate with respect to the debtor on the 30th day after the filing of the later case” (emphasis supplied). The majority of the cases thus far reported (and all reported cases in the Second Circuit, where we practice) have concluded that under this Code section the Automatic Stay only terminates concerning the Debtor and Property of the Debtor, but it continues concerning Property of the Estate. This is critical because prior to Plan confirmation the house remains protected by the Automatic Stay under Section 362 (c)(1) because it is Property of the Estate, and Property of the Estate is not negatively impacted by a failure to Extend the Automatic Stay. After the Chapter 13 Plan is confirmed the house does become Property of the Debtor, which is (normally) negatively impacted by such a failure, but the case law reported thus far in this Circuit makes it clear that once a Chapter 13 Plan is confirmed the Plan binds the debtor and its creditors regardless of whether the Automatic Stay was vacated (or never extended) prior to confirmation. Accordingly, the moral of the story appears to be that if you are a serial Chapter 13 filer and you forget to Extend the Automatic Stay you can still save your house provided (1) you only had one other Chapter 13 dismissed within the prior year, and (2) you get your Chapter 13 Plan confirmed before the house gets sold at a foreclosure auction sale.

It should be noted that Section 362 (c)(4) does not provide such a generous “safe harbor” for those debtors who (1) have had two (or more) Chapter 13 cases dismissed in the prior year and (2) forget to Impose the Automatic Stay. The Automatic Stay simply never comes into play in such a case, and if the foreclosing lender successfully completes the foreclosure auction sale before their Chapter 13 Plan is confirmed, the serial filer is simply out of luck. However, even this type of serial filer is not without some hope, because if they do happen to get their Chapter 13 Plan confirmed before the foreclosure auction sale occurs, the confirmed Chapter 13 Plan will bind the mortgage holder even though the Automatic Stay was never imposed.

Sometimes Congress’ seeming inability to draft intelligible legislation can have unintended consequences which can actually benefit the debtor.

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