The Journal of The DuPage County Bar Association

Back Issues > Vol. 11 (1998-99)

Creditors Remedies for Serial Bankruptcy Filings
By Barbara S. Boiko and Michael H. Walsh


"The bankruptcy laws were enacted to render aid and comfort to honest people who, primarily through no fault of their own, find themselves in difficult financial circumstances" (Clark and Lane, 1994:708). Toward that end, many institutional mortgage lenders have devised programs designed to help keep mortgage debtors in their homes when financial troubles befall them (see, e.g., the HUD regulations at 24 CFR 203.355). When it is not possible to save the home, these same creditors also have programs designed to mitigate the loss occasioned by the debtor’s troubles (see 24 CFR 203.402; see also the attachments to VA Lender Handbook H29-94-1 and the FHLMC Single Family Seller/Servicer Guide). As evidenced by these programs, institutional creditors acknowledge that bankruptcy is a fact of life and that when debtors turn to the bankruptcy code for protection and an opportunity to reorganize their debts, it is not usually an attempt to shirk their contractual obligations. However, in some instances, debtors abuse the opportunity for a fresh start offered by the bankruptcy laws and, by filing numerous cases within a short amount of time (often on the eve of a foreclosure sale), seek to thwart their creditors attempts to pursue lawful remedies. Bankruptcy courts have had many opportunities to discuss debtors’ opportunistic use of the automatic stay, and as a result, a considerable body of commentary exists regarding the lawfulness of such behavior.

This article discusses remedies available to creditors when debtors try to take advantage of the automatic stay in this fashion. In addition to discussing options specifically set forth within the bankruptcy code, the article will discuss a remedy that several courts have implemented but which is not (yet) a part of the statutory scheme: in rem relief. Before turning to a discussion of creditor remedies, a brief discussion of the automatic stay in bankruptcy is in order

Section 362: The Automatic Stay

Section 362 of the bankruptcy code, 11 U.S.C. 362, provides that upon the filing of a petition with the bankruptcy court, most actions then pending against the debtor, including foreclosure actions against the debtor’s home, are stayed by operation of law. See 11 U.S.C. 362(a) for actions that are stayed, and 11 U.S.C. 362(b) for actions that are not stayed. Debtors need not give notice to creditors of the filing of the bankruptcy petition in order for the stay to take effect. Because the stay takes effect by operation of law, actions taken in violation of the stay are void. In re Garcia, 109 B.R. 335 (N.D. Ill. 1989), Cohen v. Salata, 1999 WL 163673 (Ill.App. 1 Dist. March 25, 1999). Creditors ignore the stay at their peril because section 362(h) allows individuals injured by willful violations of the stay to recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, punitive damages. While courts are split on what proof is necessary in order to award damages for emotional distress resulting from an intentional violation of the automatic stay (see In re Aiello, 231 B.R. 684 (Bankr. N.D. Ill 1999) and the cases discussed therein), most courts have found that debtors are entitled to their attorneys’ fees for any appeal of a 362(h) award. In re Walsh, 208 B.R. 949 (Bankr. N.D. Cal. 1997). Clearly, creditors must be wary of bankruptcy filings during the course of their proceedings against debtors and their property.

Section 362(d) and Relief from the Automatic Stay

The foregoing discussion is not meant to imply that creditors are without any recourse when a debtor files bankruptcy. Section 362(d) provides that a secured creditor may be entitled to relief from the automatic stay for cause, including a lack of adequate protection. Lack of adequate protection includes: (a) no equity in the security, (b) lack of insurance with respect to the secured property, (c) lack of current contractual payments, and (d) the property is not necessary for an effective reorganization

A secured creditor who has inadvertently violated the automatic stay by proceeding in court or repossessing the security should seek to annul the automatic stay if the creditor is not adequately protected 11 U.S.C. 362(d). By having the automatic stay annulled, the creditor avoids the problem of having the action taken in violation of the automatic stay considered void.

Annulment is also appropriate when a creditor violates the automatic stay without knowledge of the debtor’s most recent petition when that petition is filed after relief was granted to the creditor in one of the debtor’s prior cases. In re Hall, 216 B.R. 702 (Bankr. E.D. N.Y. 1998). Annulment is appropriate because by the time the creditor learns of the most recent petition, it has likely incurred significant expense. In fact, in cases where the debtor has filed several bankruptcy petitions, commentators have suggested that the debtor’s attorney "may have to take affirmative steps to notify creditors about the bankruptcy filing. Ginsberg & Martin, 1997: 3-12, but see In re General American Communications Corp., 130 B.R. 136 (SD N.Y. 1991, (debtor is under no duty to inform opponents of pending bankruptcy cases). In summary, the combination of lack of notice, a serial (or bad faith) filing, and lack of adequate protection is usually sufficient to annul the automatic stay.

Serial Filings and Other Creditor Remedies

In addition to seeking annulment of the automatic stay, creditors have additional remedies in cases where the debtor has engaged in a pattern of serial filings. These remedies, if awarded, will allow creditors to proceed against the debtor without fear of sanction (11 U.S.C. 362(h)), and allow creditors to bring to a resolution their efforts to assert their contractual rights. This is because all of these remedies prohibit the debtor from filing another bankruptcy petition for a period of at least 180 days (11 U.S.C. 109(g))

Good Faith issues and dismissal with prejudice

A creditor may request dismissal where the plan of reorganization proposed by the debtor is not done in good faith. 11 U.S.C. 1325 (a)(3). Certain factors used by courts to test whether the debtor’s Chapter 13 plan was filed in good faith include:

• The debtor has few or no unsecured creditors.

• There has been a previous bankruptcy petition by the debtor or a related entity.

• The pre-petition conduct of the debtor has been improper.

• The petition allows the debtor to evade state court orders.

• There are few debts to non-moving creditors.

• The petition was filed on the eve of foreclosure.

• The foreclosed property is the sole or major asset of the debtor.

• There is no possibility of reorganization.

• Debtor’s income is not sufficient to operate.

• The debtor filed solely to obtain the automatic stay.

In re Love, 957 F. 2d 1350 (7th Cir. 1992); In re Powers, 135 B.R. 980 (Bankr. C.D. Cal. 1991); In re Grieshop, 63 B.R. 657 (N.D. Ind. 1986). See also Clark and Lane, 1994: 679-680.

In In re Grieshop, 63 B.R. at 663 the court discussed the issue of good faith by focusing on several factors: deficiencies or inaccuracies in the debtor’s schedules and statements; the fundamental fairness of the plan; and the debtor’s motive for filing the petition. The court held that a "totality of the circumstances" analysis was the appropriate manner to determine the existence of good faith and whether the debtor had abused the provisions of title 11. In In re Love, 957 F. 2d at 1357, the court held "the focus of the good faith inquiry ... is often whether the filing is fundamentally fair to creditors and, more generally, is the filing fundamentally fair in a manner that complies with the spirit of the Bankruptcy Code’s provisions." Thus it is clear that when making a good faith argument, it is important for a creditor’s attorney to review the debtor’s schedules and plan carefully, and to examine the timing of the bankruptcy filing to ensure that the pleading is well grounded.

Bad Faith and Dismissal With Prejudice

In addition to requiring that a plan of reorganization be filed in good faith, the bankruptcy code has been construed to require that bankruptcy petitions not be filed in bad faith. In re Love, supra. The bankruptcy code allows dismissal of a case for cause pursuant to 11 USC 1307. The courts apply a "totality of the circumstances" test to determine bad faith. In re King, 126 B.R. 777 (Bankr. N.D. Ill. 1991); In re McKissie, 104 B.R. 189 (Bankr. N.D. Ill. 1989). Commonly cited bad faith factors include:

• a debtor’s ownership or interest in only one asset;

• improper pre-petition conduct by the debtor;

• the presence of few unsecured creditors;

• the posting of the debtor’s property for foreclosure coupled with an unsuccessful fight against the foreclosure in state court;

• the debtor and the principal creditor have litigated to a standstill in state court and the debtor has lost or been required to post a bond;

• the debtor evaded court orders by filing the petition;

• the timing of the petition’s filing is overly strategic;

the debtor’s motive for filing the petition is improper; and

• the debtor’s actions negatively affected creditors, both before and after the debtor filed the petition

(Thurman and Johnson, 1997: 14).

When a creditor is seeking relief from the automatic stay based upon the allegation that the debtor’s filing was in bad faith, the burden of proof shifts to the debtor to prove that the proposed plan of reorganization has the possibility of succeeding. If the debtor is unable to prove that the case is viable, he risks being sanctioned by the court in the amount of the creditor’s attorneys’ fees.

As practitioners in a firm that concentrates in foreclosure and bankruptcy, we find that petitions filed on the eve of the foreclosure sale are the most common examples of bad faith filings. Those filings usually take place when no forbearance or other reduced-payment agreement could be made with the mortgagee, or when the debtor/mortgagor was unable to reorganize successfully in a previous bankruptcy case. In one instance, the bankruptcy court dismissed a debtor’s second petition with prejudice because the new case was filed just hours after the court had denied the debtor’s motion to reopen the prior bankruptcy case. Because the second petiton was filed in bad faith, sanctions were also awarded against the debtor’s attorney. In re McKissie, 103 B.R. 189 (Bankr. N.D. Ill. 1989).

In cases where the creditor challenges the good faith nature of the plan, or if the creditor alleges that the debtor’s latest filing was done in bad faith, the creditor should ask that the case be dismissed with prejudice. Authority for a dismissal with prejudice stems from section 109(g) of the code. Section 109(g) provides that dismissal of the case will be with prejudice if: (1) the case was dismissed by the Court for willful failure of the debtor to abide by orders of the Court, or to appear before the court in proper prosecution of the case; or (2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay.

Subsection (2) creates a trap for the careless debtor. If the debtor seeks a voluntary dismissal after a creditor has filed a motion for relief from stay, then by operation of law the debtor is barred from re-filing another petition for 180 days. Subsection (1) authorizes the court to impose a bar upon the finding that the latest petition is an abuse of the bankruptcy process.

A New Remedy for an Age Old Abuse

The remedies discussed above, while effective in most situations, will not protect creditors from debtors intent on abusing the bankruptcy system. For example, where there are multiple signatories on the mortgage and note, purposeful individual filings can result in an indefinite stay against creditor collection activity. Another common abuse involves the transfer, by a debtor, of a small interest in real property that is being foreclosed upon, to a person who is not obligated by the note and mortgage. After the property is transferred, the new "owner" then files a bankruptcy and includes the subject property as part of the bankruptcy estate. In response to these and similar abuses, courts outside of the Seventh Circuit have devised another form of relief for creditors, In Rem relief.

A leading case on this subject is In re Yimam, 214 B.R. 463 (Bankr. M.D. 1997). Yimam deals with a debtor and nondebtor spouse, who, between the two of them, had filed seven (7) bankruptcy cases in an attempt to forestall a foreclosure action against their residence. As a result of these serial filings, the couple had lived in the residence for more than five (5) years without making payments on the mortgage. The court found these petitions to be an abuse of the bankruptcy system, and done for no other purpose than to avoid foreclosure. Reasoning further, the court found that:

[T]his court has the power and the duty to implement an appropriate order to prevent the continuing abuse of the bankruptcy process by the Yimams. 11USC Section 105 (a) provides: the court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

As a consequence of this finding, the court entered an order that prevented the property from being included in any bankruptcy estate for 180 days. The court wrote "[t]he restriction does not prevent the debtor or her husband from filing another bankruptcy case when permitted by law to do so. Neither does [the order] bar the sale or refinancing of the property. However, the filing of a bankruptcy case will not extend the protection of the automatic stay of section 362(a) of the Bankruptcy Code to the subject property and will not interfere with any foreclosure proceeding then pending or thereafter filed." 214 B.R. at 467. Similar orders where entered on behalf of creditors who were the victims of the transfer scheme described above in In re Snow 201 B.R. 968 (Bankr. C.D. Cal. 1996) and In re Fernandez 212 B.R. 361 (Bankr. C.D. Cal. 1997).

In the Report of the National Bankruptcy Review Commission ("NBRC"), of which our own Judge Ginsberg was a member, the Commission proposed that Congress amend Section 362 to specifically allow for In Rem orders. NBRC Recommendation 1.5.6. states that Section 362 should be amended to provide that the filing of a petition by an individual does not operate as a stay with respect to property of the estate transferred by that individual to another individual who was a debtor under title 11 within 180 days of the filing of the instant petition, unless the court grants a stay with respect to such property after notice and a hearing on request of the debtor Recommendation 1.5.6 does not discuss use of in rem relief in cases similar to Yimam. In addition, we note that neither House Resolution 833 nor Senate Bill 625, the two bankruptcy reform provisions currently pending in Congress, include the amendment to Section 362 suggested by the NBRC.

Challenges to the use of in rem relief center around issues of notice and due process. More specifically, opponents of in rem relief argue it is fundamentally unfair to bind parties who are not before the bankruptcy court and who have not been given an opportunity to be heard. The court in In re Snow addressed these issues by requiring that the order become an equitable servitude, and therefore be recorded in the chain of title to the property. Recordation of an order containing in rem relief would provide constructive notice to future "owners," thus making them aware of both the bankruptcy proceeding and the restraint on immediate access to the protection of the automatic stay for a short time in the future. The Snow court also set forth a form order that contains the following language:

Upon recordation of this order in the county recorder’s office, it shall be binding on all subsequent transferees by the debtor(s) of the property herein described for a period of 180 days from the entry of this order by this court. 201 B.R. at 976.

Recordation of an order with this language in the chain of title to the property should resolve due process and notice issues.


The steady increase in bankruptcy filings in the past several years has increased the cost of doing business for those who provide credit, including the cost of litigation required to collect on collateral. Effective representation of creditors in bankruptcy requires that the attorney investigate the facts surrounding the filing of the petition and the provisions of a debtor’s proposed plan. Creditors who find themselves stymied by debtors who engage in strategic use of the automatic stay should draft pleadings that incorporate facts and arguments which would entitle them to the remedies discussed above.

Even when creditors’ attorneys zealously represent their clients, because of the mischief of scheming debtors, there may be occasions when the relief currently provided for in the bankruptcy code will not result in a permanent resolution of either the abusive bankruptcy filings or the collection litigation. Because this is often the case, we would encourage courts to follow the holding in Yimam, and we would encourage Congress to heed the suggestions of the National Bankruptcy Review Commission.


Clark, Leif M., and Sharron B. Lane. 1994. "Having Faith in Good Faith Analysis." 683 PLI/Comm 669.

Ginsberg, Robert E., and Robert D. Martin. 1997. Ginsberg and Martin on Bankruptcy. 4th Edition. Aspen Law & Business: New York, NY.

Thurman, William Thomas, and Brett P. Johnson. 1997. "Bankruptcy and the Bad Faith Filing." 10-DEC Utah B.J. 12.\

Barbara S. Boiko is Senior Associate at Shapiro & Kreisman, Northbook. Her practice is concentrated in Real Estate and Bankruptcy. She received her Undergraduate Degree in 1985 from the University of Illinois and her Law Degree in 1989 from John Marshall. She may be reached at

Michael H. Walsh is an Associate at Shapiro & Kreisman, Northbook. His practice is concentrated in Real Estate and Bankruptcy. He received his Undergraduate Degree in 1985 from the University of Kentucky and his Law Degree in 1988 Ohio State University. He may be reached at

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