Debtor Files Multiple Bankruptcy Cases to Stave Off Foreclosure

In re Johnson, 2013 W.L. 172455 (Bankr. D.S.C. 2013)

You must file bankruptcy in good faith, not as an attempt to game the system

The court will dismiss, with prejudice, serial filings intended to stall foreclosure with no intention or ability to reorganize and may grant in rem relief to creditors.

Bankruptcy is for reorganization. All of its benefits aim toward that end. The automatic stay is no exception. The automatic stay prevents creditors from acting against the debtor in order to give the debtor time and space to effectively reorganize his finances. It’s not meant to be used as a weapon against creditors. If you misuse it, you may lose the option of filing for bankruptcy at all for years to come.

The Facts of In Re Johnson

Butch was unemployed. He depended on the kindness of family and friends for his basic needs. He had one prized possession – his house. Of course, the kindness of friends and family can only extend so far, and without any income Butch couldn’t make any payments on  his home. He filed for bankruptcy to gain the protection of the automatic stay and prevent foreclosure. In re Johnson, 2013 W.L. 172455 (Bankr. D.S.C. 2013)

Five Bankruptcies Signaled Bad Faith

However, this wasn’t Butch’s first bankruptcy. It wasn’t his second or third, either. In fact, it was the fifth time he had filed for bankruptcy in as many years. Other than the first time, Butch filed pro se, which means he did not retain an attorney. Each time, his case was dismissed because he had no income and could not support any sort of payment plan. After the first filing, the court dismissed each case with prejudice, barring him from filing for anywhere from six months to two years. He continued to re-file anyway and succeeded in preventing foreclosure for seven years. Id. at 1-2.

The fourth time Butch filed for bankruptcy, the court barred him from filing under chapter 13 for two years. Less than three months later, he filed under chapter 11. He filed his Statement of Compliance with Credit Counseling Requirement but failed to provide any of the other necessary paperwork or pay the filing fee. At the meeting of creditors, Butch stated that he had filed for bankruptcy in order to avoid foreclosure because he “desperately” wanted to save his home. Id. at 3. The bankruptcy trustee moved for dismissal of Butch’s case.

The court may dismiss a bankruptcy case for lack of good faith, which requires a showing of objective futility and subjective bad faith. 11 U.S.C.A. § 1112(b). Butch had “no realistic chances of reorganizing as he [had] no regular or significant source of income from which to fund a plan or pay for normal living expenses.” Id. 4. Bankruptcy is meant to help debtors reorganize their finances; Butch had nothing to reorganize. So, his case was objectively futile. Id.

Analysis of subjective bad faith

When examining a bankruptcy for subjective bad faith, the court seeks “to ensure that the debtor is attempting to use the Bankruptcy Code to reorganize, rehabilitate, or preserve an existing or ongoing business rather than to simply delay collection efforts by creditors.” Id. at 3. Butch himself stated that he had filed in order to prevent foreclosure; he knew he had no way to fund a bankruptcy plan but he wanted to take advantage of the automatic stay. The court found that he had filed in bad faith because he had no intention of actually completing the bankruptcy process.

The court dismissed Butch’s case with prejudice, barring him from filing under any chapter of the Bankruptcy Code for two years. It also granted in rem relief to his creditors regarding his house. In other words, the automatic stay would not apply to the house for two years and the creditors would be free to foreclose.

Butch “failed to demonstrate the intent or the ability to reorganize his financial situation” and was “unwilling to comply with the requirements of the Bankruptcy Code and Bankruptcy Rules.” Id. at 5. The court did not appreciate his serial, abusive filings. He sought to take advantage of bankruptcy for the automatic stay. For honest debtors, bankruptcy is a tool for reorganization of finances. For dishonest debtors, it can be a powerful way to buy time and delay creditors’ actions. The court will examine your case to determine whether you are honest and dishonest filings will receive no mercy.

See also: Five laws every consumer should know