Limits to the Automatic Stay

The automatic stay is an injunction that protects a debtor from the actions of their creditors. The stay is imposed immediately upon the filing of a bankruptcy under any chapter. Its purpose is to protect debtors from collection actions of their creditors, either by statute or agreement. The most common example in consumer bankruptcies is where a debtor files bankruptcy to stop a foreclosure (non-judicial) sale. The authorization allowing the bank to foreclose on a property is most commonly found in the power of sale clause of the deed of trust securing the loan. Other types of collection actions include repossessions, levies, garnishments, and imposition of judgment liens.

For consumer bankruptcies, the automatic stay is more applicable to situations where the debtor is seeking to reorganize their assets and liabilities, either through a chapter 13 or chapter 11. Normally, upon default of the borrower, a creditor may exercise a handful of remedies to collect on the past-due debt. The stay affords the debtor near-absolute protection from her creditors in the midst of the bankruptcy so that the debtor may propose some kind of debt servicing through a chapter 11 or 13 plan.  For example, a debtor facing foreclosure on her home may file a chapter 13 to stop the sale and to propose a chapter 13 plan that provides for payment of the arrears or past-due payments over a period of three to five years. The stay protects the debtor's home from being foreclosed upon so long as the debtor provides for proper treatment of the debt arrears, and follows through with that payment plan.

On the other hand, a debtor may benefit from the automatic stay in the event her wages are being garnished or her bank account is being levied as a result of a legal judgment. A debtor may have a judgment against her for an unpaid balance of an unsecured credit card; the judgment-creditor may execute (collect) the judgment by way of a wage garnishment. In such a situation, the debtor may file a chapter 7 to stop the garnishment and seek a discharge of the debt in full.

Creditors, however, have the ability to request relief from stay, in order to proceed with some means of collection. Prevailing on the motion for relief from stay would allow the creditor to proceed with collection pursuant to valid state law or agreement. Examples of reasons to request relief include failure to address treatment of a secured obligation, either in a chapter 7,13 , or 11. Also, a creditor may request relief in the event the debtor is not making her chapter 13 payments.  In other words, a debtor may not file a bankruptcy to stop collection of a debt only to let the case sit idly without addressing treatment of particular debts.

Next is the case of the serial filer.  A serial filer is a debtor who seeks to file mulitple cases in succession, not to propose some kind of reorganization plan, but to simply avoid her creditors or indefinitely postpone a foreclosure/repossession/collection.  The Bankruptcy Code has limited the ability of a debtor to file several cases in a row by applying conditions to application of the automatic stay in cases of multiple filings.  If a debtor has had no other bankruptcies that were pending and dismissed within the twelve months preceding the current filing, the automatic stay is effective indefinitely or until a creditor files a motion for relief.  If a debtor has had one case that was dismissed within the twelve months preceding the most current filing, the stay is only effective for 30 days from the date of filing.  If a debtor has had two or more cases that were dismissed within the twelve months preceding the most current filing, there is no automatic stay.

If a debtor has had one dismissal in the past year, the automatic stay can be extended beyond the 30 days upon motion of the debtor, and with good cause appearing therefor.  Likewise, a debtor with multiple filings within the past year may seek to impose the automatic stay upon a showing of good cause.  As long as the Court is not convinced that the prior filings were proposed in bad faith, e.g., for purposes of intentional delay to creditors, it may extend or impose the stay.  Keep in mind that these motions must be made and heard within 30 days of the filing date.