If your bankruptcy case is dismissed for any reason and you file a second case within a year, the "Automatic Stay" in the second case is different from the first. (The Automatic Stay is a protection created the moment you file. It "stays" your creditors from trying to collect on your debts. It stops lawsuits, foreclosures, garnishments, repossessions, and creditor phone calls and letters.) While the Automatic Stay usually lasts indefinitely, in your second bankruptcy case filed within a year, it lasts only 30 days unless you ask the Court to "extend" it. Generally, this rule exists to stop people from repeatedly filing and dismissing bad bankruptcy cases in order to thwart foreclosure indefinitely.

There's an extra wrinkle to this rule: The statute (11 U.S.C. § 362(c)(3)) is ambiguous as to whether the Automatic Stay's protection terminates only as to you and your property, or if it also terminates as to the property of the "estate" that was created when you filed. (The "property of the estate" includes all of your assets at the time of filing. In a Chapter 13 case, it also includes your earnings during the course of your payment plan.) As a result, a disagreement has arisen among the Circuit Courts, with a majority taking the former approach and a minority taking the latter approach.

The reasoning behind the majority approach is that it preserves the equal treatment of creditors: Let's say you're filing your second case within a year, following a dismissal, but fail to extend the Automatic Stay. You have a house with equity that you want to surrender. The house becomes property of the estate, and the Trustee takes possession, planning to sell it and distribute any proceeds to your creditors. Under the majority approach, your bank/mortgage holder can't step in and take the house all for itself; it has to get its share from the Trustee, just like all the other creditors. But under the minority approach, because there is no Automatic Stay as to the property of the estate, the bank can just step in and take the house all for itself, leaving the other creditors out in the cold.

In its February 2011 decision In re Reswick (2011 WL 612728), the Bankruptcy Appellate Panel (BAP) for the Ninth Circuit (which includes California) came down on the side of the minority approach. The facts of Reswick are atypical: The debtor filed his second case within the year (the first having been dismissed for failure to make Chapter 13 Plan payments), but he did not obtain an extension of the Automatic Stay. After 30 days elapsed, a creditor, based on a pre-petition lawsuit, started garnishing the debtor's wages (which, in Chapter 13 cases, are property of the estate). When the debtor sought damages for violation of the Automatic Stay, the Court found that there was no Automatic Stay and therefore no violation. The BAP agreed.

Thus, the decision in Reswick gives preference to creditors who happen to have obtained pre-petition judgments. An appeal to the Ninth Circuit Court of Appeals is expected. For Californians who've had one bankruptcy case dismissed and are contemplating a second filing within a year, the lesson of here is clear: Make sure your lawyer knows about your previous case, and make sure he or she seeks an extension of the Automatic Stay.