Fool me once, fool me twice. . . but not three times

Bankruptcy Judge Whitney Rimel (of Fresno) issue an interesting opinion (In re Gay, No. 06-10472) recently on the issue of the circumstances under which the automatic stay can be reinstated. By way of background, the automatic stay goes into effect immediately upon the filing of a bankruptcy case. It prevents creditors from taking any action to collect a debt.

The new bankruptcy law (BAPCPA) made some changes to the automatic stay, including a provision that if you filed one bankruptcy within the year preceding the current filing and that filing was dismissed for any one of several reasons, the automatic stay expires after 30 days and another provision that if you filed had two bankruptcy cases dismissed within the last year, there is no automatic stay upon the filing. It can be reinstated upon a showing by clear and convincing evidence that the case was filed in good faith.

In In re Gay, there had been two previous dismissals. In considering whether the new case was filed in good faith, Judge Rimel looked primarily to the issue of whether there had been a change in circumstances. The debtors presented evidence that their income had stabilized since the previous filings. However, the court found this unpersuasive and determined that the debtors did not rebut by clear and convincing evidence the presumption that the third filing was not in good faith. Consequently, the stay was not reinstated and the debtors probably lost their home.

This should give anyone pause who is considering filing a bankruptcy case. If the case is dismissed, you may lose the automatic stay if you have to file again. This is especially a problem for debtors who represent themselves in bankruptcy. I had that issue with a client recently. He filed in pro per (without an attorney), did not comply with all of the requirements, and his case was dismissed. He immediately refiled and then hired me to get the automatic stay reinstated (which we did). He could have avoided a lot of problems by hiring an attorney to help him with the first case.