Bankruptcy Dismissal vs Discharge Can Both Be Light in a Dark Place
A bankruptcy case may end in two ways: by completing the repayment plan or by dismissal. The vast majority of cases are successfully concluded through completion of a repayment plan, but for those few cases that cannot be completed successfully, bankruptcy law provides a mechanism to allow an individual debtor to walk away from most of the obligations associated with the bankruptcy. That is called "discharge." The differences between an automatic dismissal and a discharge are outlined below.
1) Occurrence
When Chapter 7 or Chapter 13 Debt is Dismissed
When a Chapter 7 or Chapter 13 filing is dismissed, the Court will not approve a bankruptcy plan. Chapter 7 and Chapter 13 debt dismissals are typically granted because a debtor fails to comply with the bankruptcy rules or meet certain bankruptcy requirements for a variety of reasons ranging from missing creditors on the petition to not filing required paperwork. Dismissal is usually immediate and not under the court's discretion.
The only way a debtor's case is not subject to automatic dismissal is if they can demonstrate that there was good cause for why their petition was filed late or incomplete.
In both Chapter 7 and 13 cases, dismissing your case is on your record for ten years.
Dismissals are not removed from your credit report, so you may experience negative consequences in your credit rating if your case is dismissed.
When Chapter 7 or Chapter 13 Debt is Discharged
When a Chapter 7 or Chapter 13 debt gets discharged, the court will sign an order to release you from personal liability for that debt. Under Chapter 7 and Chapter 13, you are released from all debts that can be discharged.
While a dismissed bankruptcy is on your record for ten years, a Chapter 7 or Chapter 13 discharge is removed from your credit report as soon as the Court issues it. That might make a significant difference in how lenders perceive you and might improve your chances of getting approved for future loans, mortgages and other lines of credit.
2) Timeframe
Filing under either section begins with proceedings aimed at protecting property from creditors, but only Chapter 7 can result in a discharge of debt. Under Chapter 13, the Court establishes a repayment plan and enforces it through a trustee. That process takes an extended period to complete, during which creditors cannot attempt to collect on payments owed to them.
For bankruptcy discharge, the debtor must have completed all payments that are part of their plan in Chapter 13 bankruptcy or have paid off 100% of their debt as part of the Chapter 7 bankruptcy. In this case, the debtor will be compelled to wait about 4-5 years to discharge their debts.
According to bankruptcy law, this section's main focus is discharging as many debts as possible based on your income level and allowable expenses. A common misconception is that debtors must wait four years before they're allowed to file again. However, this restriction only applies if your previous bankruptcy filing occurred within six years of the current petition or if you received a discharge within the past two years.
3) Eligibility
Discharge
You should pass a means test to qualify for a Chapter 7 discharge, which calculates the difference between your income and monthly expenses. If you have too much disposable income left over after paying living expenses, you might be denied a request for relief.
Dismissal
In contrast, there's no such requirement under bankruptcy dismissal. Once you've filed a petition stating your intention to repay the debt through a court-approved repayment plan, all debts are consolidated into one payment to the trustee. After this point, eligibility is determined by whether or not creditors agree with the proposed terms.
Confusion can arise from bankruptcy law that allows debtors to file multiple times before completing mandated time frames in some instances:
If you previously filed for bankruptcy dismissal within the past six years, you must wait for another two before filing again. However, this rule has certain exceptions. For instance, Chapter 12 allows farmers and fishermen to file a second time after four years instead of six if they can prove undue hardship.
4) Different Types Of Debt
Chapter 13 only covers unsecured debts such as personal loans or credit cards. Chapter 7 can provide relief from both types of obligations – secured and unsecured – but it takes a different approach depending on which section applies. If your home is at risk of foreclosure, filing under Section 1322 (a) offers protection from eviction proceedings until the repayment schedule is complete.
In other words, once a Chapter 7 or Chapter 13 debtor is discharged, creditors may not contact them to request repayment. In addition, the filer's credit report generally will not reflect any information about their debts or bankruptcy.
In contrast, asking for relief (dismissal) under Section 706 (g) suspends foreclosure proceedings but doesn't prohibit your lender from attempting to repossess your home once the filing is complete. If an individual's Chapter 7 or Chapter 13 bankruptcy petition is dismissed, they remain responsible for repaying some types of debt; creditors may attempt to collect these debts after the case is dismissed.
5) Property Of Bankruptcy Estate
The law dictates what happens to property claimed as part of a bankruptcy dismissal filing. A Chapter 13 repayment plan results in the trustee establishing ownership rights over any property that you would otherwise sell to pay creditors after fulfilling all relief requirements. For instance, if you own a car worth less than $4,250 and have no loan balance, it will likely be returned to you with this status after the repayment period has been satisfied.
However, Chapter 7 filings follow different rules regarding how assets are distributed. If your debts are discharged, anything you can sell to repay creditors is now considered the bankruptcy estate's property. That may include expensive household items that you claimed as exempt property. Exempt property must be listed on your petition and typically includes cars, homes, tools needed for employment, retirement funds, and all other assets acquired before filing.
6) Automatic Stay
Immediately after submitting a Chapter 7 discharge filing, the automatic stay creates an immediate moratorium prohibiting any creditor action against you.
Note that this doesn't apply to child support or alimony payments; these obligations are subject to enforcement even if your request for relief is granted. However, this rule does restrict landlords from attempting to evict tenants based solely on nonpayment of rent. They can still proceed with eviction proceedings if you fail to abide by other lease terms, such as maintaining the property or not engaging in criminal activity on the premises.
In contrast, a Chapter 13 dismissal filing also results in an immediate stay on creditor action, but it's subject to some exceptions.
Landlords can proceed with eviction proceedings after falling behind on rent and failing to arrange with your creditor to continue paying rent or other expenses. Claims for child support or alimony are also not subject to the automatic stay.
When does it end?
The automatic stay remains in effect until the debtor's bankruptcy is dismissed voluntarily (Chapter 7) or has completed its repayment plan (Chapter 13). Once requirements have been fulfilled, you can file a motion to terminate the stay and resume business as usual. Unlike Chapter 7 filings, no income requirement exists for filing under Chapter 13. However, this type of relief may be harder if your monthly income doesn't sufficiently cover basic living costs. You must submit pay stubs and tax returns that indicate how much money you receive monthly to determine eligibility for this type of filing.
7) Reversal
A dismissal cannot be undone, but a discharge can be 'voided' by filing an adversary proceeding with the bankruptcy court if it is believed that the debtor committed fraud or misrepresentation. On the other hand, a dismissal can only be reversed by a joint agreement between a majority of creditors and debtors to dismiss the case or by one creditor filing for another party's dismissal.
FAQ About Bankruptcy Discharge And Dismissal
There are several reasons why one chapter of bankruptcy may be more beneficial than another. If you are trying to protect your home, for example, Chapter 13 may benefit from allowing the Court to re-affirm your mortgage obligation under certain circumstances. In constrast, if you are primarily concerned with eliminating all unsecured debt and do not own a home, Chapter 7 should be more effective. Another reason why cases are dismissed is that creditors objected or another issue with eligibility for filing - such as lack of required credit counselling.
A direct violation of the automatic occurs if creditors seize assets during a Chapter 7 case. However, if you object to your attorney's dismissal of the case and the Court has already dismissed it, the only option is to file another Chapter 7 bankruptcy petition.
You might complete a Chapter 13 repayment plan after making all payments ordered by the Court and filing required post-discharge paperwork with all entities listed on your plan as "Priority" creditors (because they were paid in full or part). You must also provide proof that you completed any required debt counselling. A discharge will eliminate personal liability for any debts not listed as priority claims.
Regardless of who initiates the dismissal, it is generally effective immediately. You are no longer obligated to pay any unsecured debt listed on your petition (unless you owe child support). However, if the Court dismissed your case because creditors objected to it or you failed to satisfy eligibility requirements, there may be other consequences.
If your case is dismissed because of creditor objections, you must still attend the 341 Meeting of Creditors (341 Hearing) and may face additional requirements to avoid dismissal of an eventual Chapter 13 filing. If the jury dismissed your case due to your failure to complete required credit counselling or satisfy other eligibility criteria, you should re-file the case after complying with these requirements. If your attorney dismisses your case, you may choose to pay for this type of dismissal because it prevents creditors from objecting later to a Chapter 7 filing if you decide to pursue a discharge.
Bankruptcy only provides relief from debt for certain types of debt, called dischargeable debt. The kind of debt that isn't discharged in bankruptcy is non-dischargeable debt. Non-dischargeable debts cannot be wiped out with the end of bankruptcy like dischargeable debts can be.
Secured debts, support claims, recent taxes, and student loans all survive an individual bankruptcy with no change in their status. Also not discharged are individual or business-related frauds committed against creditors before the bankruptcy filing date ("preference" fraudulent transfers), most fines and restitution orders related to crimes, some court-ordered damages for injuries caused by willful or malicious actions (like drunk driving incidents).
There are also special types of non-dischargeable debt that have nothing to do with the impact on the creditors described above, called non-dischargeable debt. This type of debt consists of:
Fines
Restitution or other amounts ordered by the Court to reimburse victims of crimes
Support obligations, including a child and spousal support
Certain tax penalties incurred within three years before the bankruptcy filing date that is not covered by a tax payment plan already in place
Debts arising from property that's been unlawfully taken under state law for certain criminal acts (including rioting)
Debts emanating from willful and malicious injury to another person or to that person's property caused by someone you were liable for under local/state/federal law for acting in a grossly negligent manner while driving a vehicle or vessel under the influence of alcohol or drugs
You will not lose your home if you file for Chapter 7 bankruptcy unless it is worth more than the state's homestead exemption and doesn't meet other filing requirements. Certain exceptions exist when you file for Chapter 13 bankruptcy (if you got behind on house or vehicle payments BEFORE filing for bankruptcy). In some cases, people have lost their cars or homes because of unpaid property taxes, insurance premiums, or mechanics liens. However, these issues should be addressed during the repayment plan to keep this from happening (ensure you meet your tax obligations).
Bankruptcy provides relief from these types of debts only when the debtor files for Chapter 13 bankruptcy, not Chapter 7 bankruptcy. Most individuals can keep their vehicles and homes after filing for Chapter 7 bankruptcy without problems, but there are certain exceptions (if you got behind on house or vehicle payments before filing for bankruptcy). In some cases, people have lost their cars or homes because of unpaid property taxes, insurance premiums, or mechanics liens.
Even if your creditor cannot repossess the item you used as collateral, there is a risk that they will seek to recover it by other means like foreclosure or a deficiency judgment.
Finally,
Bankruptcy is a legal procedure where debtors who cannot repay their financial obligations are legally relieved of some of their debts by the court. It's important to understand that filing Chapter 7 bankruptcy terminates or dismisses your case, and you will likely have to pay back some or all of your debts. In contrast, a Chapter 13 bankruptcy case is closed without a discharge being granted to the debtor for failure to take and pass the required bankruptcy test. You may file again but must pay another filing fee in this situation.
An increase in the number of bankrupt people has made many individuals wonder if they are better off after getting bankrupt. After all, it is not just losing money that you invested in your business that stings, but the fact that you lost it all and were left with nothing to show for. That is why most people seek discharges or dismissals for their bankruptcy. However, bankruptcy dismissal is often confused with bankruptcy discharge because they are so closely related, but the concepts are different. They are similar because, in both scenarios, a debtor no longer has personal liability for discharged debts, but there are key differences, including timing, debt eligibility and how taxes are affected.
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