One of the primary reasons people file for bankruptcy is to obtain a stay2 against certain actions taken against them by their creditors. Prior to the enactment of BAPCPA3 , the stay went into effect the moment the case was filed, hence the term “automatic stay,” and continued until the earlier of the closing or dismissal of the case, the debtor receiving or being denied a discharge, or relief from the stay being granted. Now, however, under the new law the stay may not be “automatic” nor is there necessarily a “stay” when the case is filed. The new provisions found in 11 U.S.C. §§362(c)(3) and (c)(4)4 limit, or in certain circumstances even deny, debtors the use of the automatic stay to stop creditor action. These provisions were enacted by Congress to stop serial filings by debtors. In re Charles(II), 334 B.R. 207, 219 (Bankr. S.D. Tex. 2005). However, when these provisions actually come into effect has been the subject of much litigation recently.
New Code Rules:
New § 362(c)(3) limits the automatic stay only to 30 days if the debtor had one case pending within one year prior to the filing of the present case. The term “pending” does not mean that the case was still open within the year of the filing of the current case. If a case was dismissed more than one year before the current case was filed, but was closed within the year the current case was filed, the 30-day restriction of § 363(c)(3) does not apply. In re Moore , 337 B.R. 79 (Bankr. E.D.N.C. 2005). Under §362(c)(4), the automatic stay will not apply at all if the debtor had two cases pending within the preceding year of the filing of the present case.
Motions to Extend the Stay:
BAPCPA instead permits a debtor to petition the court to extend the stay beyond 30 days or to impose a stay under §362(c)(3)(B) and (c)(4)(B). Section 362(c)(3)(B) provides for the possibility of continuing the stay beyond the original 30-day period if the debtor meets four requirements, namely: (1) file a motion to extend with the court; (2) send notice of the motion to all creditors that the debtor is seeking to stay; See In re Collins, 334 B.R. 655, 659 (Bankr. Minn. 2005) (motion to extend stay denied where debtor only served U.S. Trustee and chapter 7 Trustee but did not serve creditors); (3) complete the hearing before the 30 days expires; See In re Taylor, 334 B.R. 660 (Bankr. D. Minn. 2005) (a hearing held eight days or five days after the motion was filed was insufficient notice); In re Toro-Arcila, 334 B.R. 224 (Bankr. S.D. Tex. 2005) (if a motion to extend is not timely filed, the court may not consider it); In re Thomas, ___ B.R. ___ 2006 WL 278544 (Bankr. E.D. Mich. 2/2/06)(motion must be filed within 7 days of filing the petition); and (4) prove the new case was filed in good faith. In re Ball, ___ B.R. ___ 2006 WL 172273 (Bankr. M.D.N.C. ½5/06); In re Charles(I), 334 B.R. 207, 213 (Bankr. S.D. Tex. 2005); In re Charles(II), 332 B.R. 538, 541 (Bankr. S.D. Tex. 2005).
Once the debtor has met the first three requirements to extend the stay, he must then present evidence that the current case was filed in good faith, §362(c)(3)(C). There is a presumption that the current case was not filed in good faith if the debtor had more than one case pending within the year before the filing of the instant case, or if the debtor had one previous case pending and the debtor failed to: (1) file or amend the petition or other documents required by the Bankruptcy Code in his or her previous case; (2) provide adequate protection to a secured creditor as ordered by the court in his or her previous case; or (3) perform the terms of a confirmed plan in his or her previous case, and (4) there has not been a substantial change in the debtor’s financial or personal affairs since the dismissal of the previous case or there is no reason to believe that the debtor will be able to obtain a discharge in a chapter 7 case, or in a chapter 13 case, that the debtor will be able to confirm and perform a plan. §362(c)(3)(C)(I). If these factors apply, the debtor must present clear and convincing evidence that the current case was filed in good faith, §362(c)(3)(C). If these factors do not apply, the debtor must demonstrate good faith by a preponderance of the evidence. In re Galanis, 334 B.R. 685, 691 (Bankr. D. Utah 2005). In determining whether the debtor filed the case in good faith the court will look to the totality of the circumstances5 and consider the following factors: (1) the timing of the petition, (2) how the debt(s) arose, (3) the debtor’s motive in filing the petition, (4) how the debtor’s actions affected creditors, (5) why the debtor’s prior case was dismissed, (6) the likelihood that the debtor will have a steady income throughout the bankruptcy case, and will be able to properly fund a plan, and (7) whether the trustee or creditors object to the debtor’s motion. Galanis at 694; In re Havner, 336 B.R. 98, 103 (Bankr. M.D.N.C. 2006); In re Ball, supra .
With respect to the timing of the current case, the sooner it is filed after the first case was dismissed, the better. Galanis, at 695, and Havner, supra at 4. This is because courts believe that creditors incur substantial costs in seeking collection of their debt and that debtors should not allow these debts to mount over time if they know that eventually they will need to file bankruptcy. Galanis at 694 and In re Havner, supra .
The second factor listed above involves a review of the amount and nature of the debts listed and determining how they arose. Courts are looking to see whether the debts listed are a result of purchase of the luxury goods or elaborate vacations rather than the unavoidable costs such as medical bills. Havner, 336 B.R. at 104; Montoya at 459. The next factor, the debtor’s motive in filing the current case, is where the courts look to see why the debtor filed the present case. It is not sufficient to merely state that the debtor wanted to stop the foreclosure of his house. Charles(II) at 222. Instead, the court is looking to determine that the debtor is truly seeking the best solution to deal with his debts. Havner at 4; Galanisat 696.
The fourth factor in considering good faith is how the current case affects the debtor’s creditors. All creditors suffer when a case is filed because they cannot immediately collect on their debt. However, when a creditor holds a security interest in collateral that is depreciating, such as a car, its harm is considered as a factor weighing against finding good faith in the current case. Galanis, at 696 and 697, Havner 2006 W.L. 51214 at 5. On the other hand, if the car is needed to get the debtor to and from work so that the debtor will be able to fund the plan, then it will be considered a factor in favor of finding good faith. In re Charles(II), at 222.
The next factor the court considers is reviewing the reasons the debtor’s previous case was dismissed. Causes such as loss of a job or a medical crisis have been found to be positive reasons for the finding of good faith, In re Phillips, 336 B.R. 818 (E.D. Okla. 2006). The sixth factor is the reliability of the debtor’s income to determine that the plan will be properly funded and completed. Id . The last factor the courts consider is whether the trustee or the creditors in the case have filed objections to the motion to extend the stay. The court will look favorably at a case where there are no objections to the motion to extend filed. Galanis at 696. The mere fact that no objections are filed does not obviate the necessity to prove the case was filed in good faith. In re Mark, ___B.R. ___ 2006 WL 164883 at 3 (Bankr. D. Md. 2006) None of these factors alone is considered determinative of a finding of good faith. Rather, the courts consider all of them and look to the totality of the circumstances to determine good faith. In re Charles(II), 334 B.R. at 223; In re Ball, supra.6
The court may extend the stay without a hearing if the motion was timely filed, was served on all creditors, no objections were filed, and the motion details all the factors in favor of finding good faith. Phillips, Supra. In drafting a motion to extend the stay, counsel need to be careful that they have properly plead each of these seven elements in detail. They may want to consider attaching an affidavit from the debtor stating the facts relied on by the debtor to rebutt the presumption. In re Wilson, 336 B.R. 338, 348 (Bankr. E.D. Tenn. 2005). If an affidavit is filed, it should be served with the motion to extend on all creditors that the debtor wants to stay, In re Montoya , 333 B.R. 449 (Bankr. D. Utah 2005).
If the debtor did not file a timely motion to extend the stay, the stay expires. The debtor, however, is not without recourse. He may file a motion to impose a stay under §362(c)(4)(B). This section does not require that a hearing be held within the first 30 days of the case, just that the motion be filed within 30 days after the case is filed. Toro-Arcila, at 226; In re Wright, ___ B.R. ___ 2006 WL 689512 (Bankr. E.D. Ark, 3/16/06). It appears that the standards for determining whether to impose a stay are the same under §362(c)(4) as they are in §362(c)(3). In re Wilson 338 B.R. at 351; In re Frazier, ___B.R. ___ 2006 WL 704160 (Bankr. N.D. Fla. 3/17/06). No opinions under §362©)(4) have been published.
As stated at the outset, the restrictions on the stay found in §362(c)(3) and (c)(4) were meant by Congress to deter serial filings. However, the restrictions may be meaningless if the courts follow the holding in the recent case of In re Johnson, 335 B.R. 806, 806 (Bankr. W.D. Tenn. 1/9/06); In re Jones , ___ B.R. ___, WL 728029 at 5 (Bankr. E.D.N.C. 3/21/06). Here the bankruptcy court found that §362(c)(3) and (c)(4)’s limitations on the stay only apply to the “debtor” and do not apply to property of the estate. Accordingly, the court held that the debtor did not need to file a motion to extend or impose a stay in his second case to prevent foreclosure on his house because the stay applied to his house and not him personally. Property of the estate is defined in §541(a) of BAPCPA to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” Section 1306 of BAPCPA expands the definition of property of the estate to include property acquired by the debtor after the case is filed and post-petition earnings.7 Therefore, the court warned “any creditor seeking to foreclose or repossess property, which by statute is “property of the estate” must file an appropriate motion seeking relief from the automatic stay.” Id .
In Tennessee, as in many jurisdictions, all orders confirming chapter 13 plans provide that property of the estate under §§541 and 1306 remain in the estate and do not vest in the debtor until the case is dismissed or discharged. Therefore, the court in Johnson concluded that the debtor did not even need to file an extension under § 362(c)(3) because that section did not apply to his residence, which is not his personally during the chapter 13 case, but is property of the estate; See also In re Laura McFarland Paschal, Case No. 05-06133-5-ATS (Bankr. E.D.N.C. 1/6/06). Thus, only when a debtor is concerned that a creditor will take action against him personally does he need to ask for an extension or imposition of the stay.
Another loophole to the restrictions of the stay in §362(c)(3) and (c)(4) can be found in § 1301 of the Code. Section 1301 provides that all actions against a co-debtor for consumer debts are stayed upon the filing of a chapter 13 case by the debtor. Thus, even if this is the third bankruptcy case filed by the debtor, if the co-debtor did not have a case pending within the previous year, §362(c)(3) and (c)(4) do not apply to the co-debtor. The stay thus protects jointly owned property of a debtor and co-debtor from action against the property that is secured by the lien on the jointly held property as long as the co-debtor was not in a previous case within the year filing the debtor’s case. See In re Parker , ___ B.R. ___ 2006 W.L. 62568 (Bankr. S.D.N.Y. 2006).
1. This article is reprinted with permission from the ABI Journal, Vol. XXV, No. 2, March 2006 and has since been updated.
2 See 11 U.S.C. §362(a).
3 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, amending the Bankruptcy Code effective October 17, 2005.
4 Section 362(c) of BAPCA sets forth:
(c) Except as provided in subsections (d), (e), (f), and (h) of this section-
(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;
(3) if a single or joint case is filed by or against debtor who is an individual in a case under chapter 7, 11, or 13, and if a single or joint case of the debtor was pending within the preceding 1-year period but was dismissed, other than a case refiled under a chapter other than chapter 7 after dismissal under section 707(b)-
(A) the stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case;
(4)(A)(I) if a single or joint case is filed by or against a debtor who is an individual under this title, and if 2 or more single or joint cases of the debtor were pending within the previous year but were dismissed, other than a case refiled under section 707(b), the stay under subsection (a) shall not go into effect upon the filing of the later case.
5 In re Havner, 336 B.R. 98, 103 (Bankr. M.D.N.C. 2006); In re Montoya, 333 B.R. 449, 458 (Bankr. D. Utah 2005).
6 Judge Keir, in In re Mark, supra, utilized a similar test but phrased it as the debtor having to pass both an objective and subjective analysis. The questions posed by Judge Keir were as follows: Why was the debtor’s prior case dismissed? What change in circumstances have occurred since the previous case was dismissed? How much is the debtor paying the creditors under the current plan, and how may prior cases did the debtor file?
7 Under §1306 property of the estate includes:
(1) all property of the kind specified in [§541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11 or 12 of this title, whichever occurs first; and
(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed or converted … whichever occurs first.