Some ideas which sound good in theory, do not measure up in practicality. For example, take one of the most significant changes to the bankruptcy code which became effective a little more than two years ago. I am referring to the changes relative to the automatic stay. The automatic stay is created by operation of law immediately upon the filing of a bankruptcy case. The stay is the most significant protection offered to a debtor when filing for bankruptcy. Under the current law, the automatic stay is limited in the case of repeat filers.
For example, if a debtor has had a case dismissed within one year of filing the present case, the stay only survives for thirty days unless extended by court order. The thought was to restrict the debtor who files a second case and increase the remedies available to creditors. This sounds good in theory for the creditors, right? The reality is that creditors, particularly mortgage companies, do not want the collateral back. They would rather allow the debtor to attempt to reorganize again in the hope that this time they will be successful.
Bankruptcy is complicated. It requires a debtor to budget and work like they have never done so before. Often, the second go around is the wake up call to get things done.
For this reason, most of my firm's motions to extend or impose the automatic stay go unopposed. This is not the desired result that neither Congress nor the creditors' lobby intended. The reality is that they simply didn't think things out far enough. They didn't realize that home values would not continue to rise like they have in the past ten years.
They had no way of knowing that the sub-prime mortgage crisis would arrive. Thus, debtors' attorneys push the paper, burden the clerk's office, and appear before the Bankruptcy Judges, simply to have our routine motions granted. Now some judges have placed qualifications on the motions. Some judges have required affidavits, schedules from prior cases and particularly detailed orders. The result is invariably the same.
To this date, I have not had a creditor oppose the extension of the automatic stay nor the imposition of the stay. So much for the additional remedies afforded creditors under the new bankruptcy code. In summary, the more things change, the more they stay the same.
Debtors still have significant protections when filing bankruptcy, even if it is the second time around. The adage that secured creditors would rather get paid then recover collateral is as true today as it was pre-reform.
David M. Siegel is the author of Chapter 7 Success: The Complete Guide to Surviving Personal Bankruptcy. He is a member of the American Bankruptcy Institute and currently practices bankruptcy law in Chicago and its surrounding suburbs. Additional information is available at Bankruptcy Chicago.
