The court may dismiss a Chapter 13 bankruptcy case if the debtor fails to make her required payments. The debtor then loses the protection of the automatic stay and must go through the time and expense of re-filing and starting a new five-year repayment plan. To mitigate this harsh consequence, courts may “reinstate” a Chapter 13 case to save debtors the burden of starting over again. Generally, nothing of note happens between dismissal and reinstatement so courts “assume the parties continue to be bound by the previously confirmed plan.” In re Murphy, 493 B.R. 576, 581-82 (Bankr. D. Co. 2013) [an enhanced version of this opinion is available to lexis.com subscribers]. What happens when the status quo changes during the “gap period”?
The Bankruptcy Court for the District of Colorado recently addressed the question of the gap period in In re Murphy. Ms. Murphy made her Chapter 13 plan payments for almost a year but fell behind, so the court dismissed her case. She moved to reinstate her case, but the creditor purchased her house in a sheriff’s sale during the gap period, while her motion was still pending. Ms. Murphy requested that the court void the sale because it violated the automatic stay, while her creditor argued that no stay was in effect during the sheriff’s sale.
The court noted that in bankruptcy, “an order of dismissal is immediately effective” and that “with dismissal, the automatic stay terminates immediately pursuant to 11 U.S.C.A. § 362(c)(2)(B).” Id. at 579. See Lugo v. Saez (In re Saez), 721 F.2d 848, 851-52 (1st Cir. 1983) [enhanced version]. Under § 349(b), a dismissal is intended to “undo the bankruptcy case, as far as practicable.” Id. at 581, quoting In re Sanitate, 415 B.R. 98,105 (E.D. Pa. 2009) [enhanced version]. With dismissal, the bankruptcy plan and the automatic stay both terminate. Neither is restored until the case is formally reinstated. So, the court allowed the sheriff’s sale of Ms. Murphy’s house during the gap period.
The court was unwilling to retroactively apply the automatic stay across the gap period because it would “invalidate legally permissible actions creditors may have taken during the gap to enforce their rights.” Murphy at 580. Within the bounds of non-bankruptcy law, creditors are free to do as they will during the gap period.
Robertson Bruce Cohen, a/k/a “Rob Jr.”, is a Denver bankruptcy attorney and the managing partner of Cohen & Cohen, P.C., 1720 S. Bellaire St., Ste. 205, Denver, CO 80222. He can be reached at (303) 933-4529.
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