New Options for Creditors under 2005 Bankruptcy Act
by Joseph G. Butler
On April 20, 2005 President George Bush signed into law the Bankruptcy Abuse and Consumer Protection Act of 2005 (“BACPA”), compelling across-the-board changes to the United States Bankruptcy Code and current Bankruptcy practice. While several provisions have been already enacted, the majority of the changes will go into effect on October 17, 2005.
Three of the BACPA’s new sections will have a significant impact on creditors looking for relief from the automatic stay to continue their debt collection practice. Sections 362(c)(3) and 362(c)(4) in particular terminate the automatic stay after 30 days for repeat or serial bankruptcy filers. An additional option for secured creditors may be to seek an in rem order protecting the real property from future filings pursuant to § 362(d)(4). This article discusses a summary of these sections and their likely practical effect.
Previous Bankruptcy Dismissal within 1 year of Filing
If the debtor has had a prior bankruptcy dismissal within a year of the filing of the current petition, BACPA provision § 362 (c)(3) terminates the automatic stay with respect to a debt or property securing a debt or with respect to any lease after 30 days. This termination option does not apply however, to a case dismissed under § 707(b) and refiled under a different chapter.
Similar BACPA provision, § 362 (c)(4) allows creditors to request that the court enter an order confirming that the stay is no longer in effect. While Section 362 (c)(3) does not mention these comfort orders, a creditor would seek them out of an abundance of caution, in addition to satisfying any future complaints from title companies. Additionally, no filing fee is mentioned in regard to these orders.
On a motion by a party in interest, the automatic stay may be extended to any and all creditors after notice and a hearing within the 30 day period. The moving party must demonstrate that the current filing has been made in good faith.
The BACPA states that the current filing is presumed to be in bad faith, but this presumption is rebuttable by clear and convincing evidence to the contrary. Section 362 (c)(3)(C)(i) further provides scenarios of when a new case is presumptively filed in bad faith:
- More than 1 previous case under 7, 11 or 13 in which the individual was a debtor within the preceding 1-year period
- A previous case under chapters 7, 11 or 13 in which the individual was a debtor was dismissed within the 1-year period after the debtor failed to (a) file or amend the petition or other documents required by the court without substantial excuse , (b) provide adequate protection as provided by the court or (c) provide the terms of a plan confirmed by the court
- No substantial change in the financial or personal affairs of the debtor since the dismissal of the most recent case or there is any reason that the current case will be concluded with a discharge (for Chapter 7 cases) or with a confirmed plan fully performed (Chapter 11, and 13 cases)
Additionally, § 362(c)(3)(C)(ii) presumes bad faith as to any creditor that commenced an action for relief and that action was still pending, or had been resolved by terminating, limiting or conditioning the stay at the time of the debtor’s previous dismissal.
Serial Dismissals with 1 year of Filing
If the individual debtor has filed 2 or more bankruptcy petitions and were subsequently dismissed within the previous year prior to filing, BACPA provision § 362(c)(4)(A) states that the automatic stay shall not go into effect upon the filing of the new bankruptcy petition.
As discussed above, § 362(c)(4)(A)(ii) does provide for comfort orders allowing a party in interest to request that the court promptly enter an order confirming the stay is no longer in effect. Similar to § 362(c)(3)(B), § 362(c)(4)(B) allows a party an interest to also extend the stay, after notice and a hearing within the 30 day period.
Additionally, the stay imposed under the bankruptcy code section 362(c)(4)(B) shall be effective on the date the court enters the order. Section 362(c)(3) does not provide a similar provision.
Section 362(c)(4)(D) presumes that the new filing is not in good faith but states that such presumption may be rebutted by clear and convincing evidence to the contrary and further provides circumstance of bad faith. The circumstances are similar to those asserted in § 362(c)(3)(C), as discussed above.
Foreclosure Sales
In practice, secured lenders looking to foreclosure on the debtor’s primary residence will likely change their procedure for a bankruptcy filed immediately prior to the foreclosure sale. Currently, most lenders cancel a foreclosure sale on the learning of a new bankruptcy filing. Under the BACPA, if the debtor is a repeat or serial bankruptcy filer, a prudent option for the foreclosing mortgagee would be to continue the foreclosure sale 30-45 days and seek a comfort order pursuant to § 362(c)(4)(A)(ii), if applicable.
Co-Debtor Stay
While sections 362(c)(4) and (c)(3) allow additional options for terminating the automatic stay, the BACPA did not amend the co-debtor stay under § 1301. The likely loophole around new sections 362(c)(4) and (c)(3) will be a decrease in joint filings of spouses. Prior to the new code enactment, a typical chapter 13 case was a husband and wife filing jointly to cure the default on a joint first mortgage. After the new enactment, pending extraneous circumstances it would be advisable for spouses to file individually. If then an additional bankruptcy filing was necessary, the other spouse could file and thus avoid the limitations provided in § 362(c). Or in another likely situation, the spouses first file jointly and a second one spouse later files individually would also not invoke the termination of the automatic stay provisions under section 362(c).
2 Year In Rem Order
Section 362(d)(4) allows a secured creditor an additional option to protect the property against future filings by seeking the entry of an in rem order. The Court will enter an in rem if the secured creditor can prove:
- the filing of the petition was part of a scheme to delay, hinder and defraud creditors AND
- the scheme involved either the transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval OR multiple bankruptcy filings affecting such real property.
Once the in rem ordered is entered by the court and properly recorded by the creditor, the order is then binding on any subsequent filings affecting the property for a period of two years from the date of the entry of the order.
The BACPA does allow a debtor, based upon a change in circumstances or good cause shown, after notice and a hearing, to move for relief from the order. No circumstances are mentioned what would constitute changed circumstances or good cause. If the property was sold, the code does not make clear if that purchaser could move for relief from the order or if the condition of recordation prior to the binding effect of the order places any subsequent purchaser on record notice that any bankruptcy filings cannot be obtained for 2 years.
Prior to the BACPA, many bankruptcy courts were entering in rem orders without any condition of recordation or period of expiration. With the enactment of § 362(d)(4), it is unclear whether courts can enter in rem orders based on the same grounds as before the new code.
If you have questions regarding this or any other legal real estate matter, please contact Attorney Joseph G. Butler, Esq. at jgb@barronstad.com