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Don’t do what he did!

Recently an almost-client, let’s call him Bob, called me looking for help. His house was being sold in a foreclosure sale the next morning, and he wanted to file a Chapter 13 bankruptcy petition to stop it. Not an uncommon situation. I’d say at least 40% of my Chapter 13’s are filed to stop an imminent foreclosure sale. (By the way, you might ask, why file a Chapter 13 as opposed to a Chapter 7? You can exit a Chapter 13 as a matter of right, while you have to get the permission of the court to exit a Chapter 7, and the court might not let you out if to do so is not in the best interest of your creditors.)

Getting back to Bob, after a 15 minute interview and after checking the bankruptcy database for the Eastern District of New York, I had to break the bad news to him: I couldn’t help him, I couldn’t file a Chapter 13 for him, and I couldn’t stop his house from being sold the next day. Here’s why.

Seven months earlier, Bob’s house was up for a foreclosure sale for the first time. He procrastinated and procrastinated, maybe he priced around a few attorneys and didn’t like what he heard, so he ran down to bankruptcy court at the last minute, filled out a “bare bones” petition (which means just the 7 page petition, but not the 50 or 60 pages of required schedules that follow), paid the $310 filing fee, the clerk filed his petition in the bankruptcy database and just like that, Bob had stopped the sale of his house.

But Bob, like many pro se (without an attorney) debtors who file a bankruptcy petition to stop an imminent foreclosure sale, did nothing else, did not fulfill the several duties that are required of a debtor in bankruptcy, and soon enough the court caught up with him and dismissed his case.

A few months later, Bob’s house was up for a foreclosure sale again. Bob liked the results the first time he filed, so he ran down to bankruptcy court again, filed a skeleton petition again, went home and once again, did nothing. Once again the case was dismissed, and once again the sale was rescheduled. This time, however, Bob finally figured it was time to call an attorney.

The reason filing a bankruptcy petition will stop a foreclosure sale is because of something called the “automatic stay.” Once you file a petition, the automatic stay immediately goes into effect and all collection and debt enforcement actions have to stop. If your wages are being garnished because of a debt you owe, it has to stop. If you are getting ten calls a day from a credit card company you owe money to, they have to stop. If your house is being sold in a foreclosure sale, it has to stop.

But bankruptcy, like everything else, is subject to abuse. The Bankruptcy Code, therefore, has several provisions designed to stop someone from taking advantage of the system by filing one petition after another to keep a legitimate debt enforcement action at bay.

For example, section 362(c)(3)(B) of the Bankruptcy Code says that if you have a bankruptcy case dismissed and then file a second petition within a year, the automatic stay only lasts for 30 days upon the filing of the second petition. If you want to keep the automatic stay in place for the duration of your case, you have to file a motion with the court requesting the extension and you have to prove to the court “by clear and convincing evidence” that, in plain English, you are not trying to scam the court with repeated bankruptcy filings.

Section 362(c)(4)(A) takes it a step further: if you have two bankruptcy petitions dismissed and then file a third petitions within a year, then the automatic stay doesn’t go into effect at all upon the filing of the third petition. The third filing won’t stop a foreclosure sale at all. You don’t get the 30-day leeway. Instead, within 30 days after you file your third petition, you have to file a motion to have the court put the automatic stay into effect. And to do that, you have to prove to the court – again, by “clear and convincing evidence” – that not only are you not scamming the court but also that your financial situation is healthy enough to make your Chapter 13 bankruptcy a successful one.

That was Bob. This would be – or would have been - his third filing within a year. He would therefore have to (i) file his petition, (ii) file a motion to have the stay put into effect, (iii) appear before the judge to argue the motion and (iv) convince the judge that the stay should go into effect. And he would have to do all this before the foreclosure sale of his home took place the next day. It just wasn’t logistically possible. Bob, in other words, had run out of time.

The moral of the story: Hire an attorney. You can’t Google your way to a successful bankruptcy filing. The issues discussed in this blog post are fairly straightforward, but even these issues have exceptions and provisions that I had to leave out because of space limitations and for the sake of readability. Hire an attorney. It will be money well spent.

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