Dismissing a Bankruptcy Case Without Discharge

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When you choose to file a bankruptcy case, regardless of what type of bankruptcy you file under, there will be one of two outcomes: discharge or dismissal.

Most people who file a bankruptcy case have one goal in mind: they are in some kind of financial distress and want to relieve that stress by discharging their debts. When the debts are discharged, the filer, called a “debtor” in a bankruptcy case, no longer has any personal liability on the debt.*  

Each chapter of the bankruptcy code has its own rules for gaining a discharge. For instance, in a Chapter 7 straight bankruptcy, the debtor has to file complete and accurate schedules, attend a Section 341 meeting of creditors, attend a financial management course, turnover non-exempt property and otherwise cooperate with the trustee, and a litany of other items. In a Chapter 13 repayment plan case, debtors have even more obligations generally centered around how much to pay each month, how many months a plan will last, what debts must be paid through the plan.

Once all those requirements are met, the court will enter an order discharging the debtor’s debts.

But what happens if the debtor fails to meet all those requirements? What happens to the discharge? The simple answer is the discharge is not entered by the court. Instead the case is dismissed and closed.

But does everything return to way it was before the case was filed?

Some things do and some things don’t. Let’s explore that a bit.

*The debt doesn’t entirely disappear. For instance, if the borrower gave the creditor a security interest in collateral, the creditor will still have a right to go after the collateral to satisfy the debt. Likewise, if there is more than one borrower on the debt, and only one files bankruptcy, the creditor will ordinarily have the right to look to the non-debtor to satisfy the debt. Even then, there is an exception when case is a Chapter 13 and the debtors file in a community property state.D

Resuming Collection Activities and Statutes of Limitation

For the most part, the effect of discharge is as if the case had never been filed. Creditors can go back to collecting the debts, initiating foreclosure procedures or repossession, continuing with lawsuits.

If the bankruptcy stopped a foreclosure, the mortgage holder doesn’t get to pick up immediately where it left off, often auctioning the property on the courthouse steps. It will have to start the process over again.

Other creditors can pick up where they left off. A car creditor can put out a call for repossession. A creditor can continue a lawsuit that was temporarily stopped while the bankruptcy continued.

Some other things are affected as well, particularly deadlines. Because the automatic stay, which goes into effect when the case is filed, prevents creditors from taking action to collect their debts outside of the bankruptcy system, deadlines like statutes of limitation are tolled. In other words, the time the bankruptcy was open and the automatic stay was in force will not be counted against the creditor for purposes of determining if a statute of limitations has run.

This can count for other deadlines as well, like deadlines to answer a lawsuit.

How to Get Dismissed

     Failing to file paperwork

Failure to file the proper paperwork leads to many early dismissals. There are many pages of schedules and statements that set out the debtor’s financial picture, including income, expenses, debts, assets and previous financial transactions. In addition, the debtor must also have filed tax returns for the previous four years and file returns each year he is in a bankruptcy case (for Chapter 13 filers) and provide pay stubs. Some bankruptcy courts have their own paperwork requirements in addition to the ones listed in the bankruptcy code.

The paperwork can be filed at the time the case is filed, or it can be filed within 14 days after the case is filed. In special circumstances, the deadline can be extended beyond the 14 days. So, there really is little excuse for a debtor’s case to be dismissed for paperwork.

And yet it happens every day.

     Skippng the Section 341 Meeting

Debtors are required to attend a meeting of creditors, also called a Section 341 meeting, after the second of the bankruptcy code that mandates it. Even though it is called a meeting of creditors, in modern bankruptcy practice creditors rarely attend. It does afford an opportunity for the trustee to clarify anything in the debtor’s paperwork that raises a question. The meeting is held under oath, and the debtor is required to speak truthfully. The debtor must provide identification, usually a state issued identification card like a driver’s license and a Social Security card.

The time and date for the 341 meeting is set by the court. If the debtor cannot attend for some reason, the meeting will usually be continued to another date. The meeting can pose a challenge to those who are ill, out of the country or incarcerated and cannot attend in person. Courts have adapted to those issues by using telephonic or video conferencing when it is not practical for the meeting to be continued until the debtor is available.

     Forgetting the Financial Management Course

After the case is filed, each individual debtor has to complete a financial management course before the case can be discharged. This course is available in person, by phone or over the Internet, and is offered by a number of providers. You can get more information on the course at Bankruptcy's Debtor Education Requirement.

If the debtor fails to take the financial management course, or fails to file a certificate of completion after they file the course, the case will be dismissed without the discharge being entered. After that, it will be necessary for the debtor to file a motion with the court requesting that the case be reopened for the purpose of filing the certificate and entry of the discharge order. For this, the court charges a new filing fee. In addition, the debtor’s attorney will most likely charge a fee, also. But without the financial management course certificate, the case will forever be dismissed without a discharge and the debtor’s creditors will not be prohibited from taking actions to collect their debts.

Dismissed, but Assets Go to the Trustee

A Chapter 7 case consists of two distinct tracks. The first one concerns whether the debtor will get a discharge of debt. In the other track, the trustee administers property that can be sold to satisfy creditors. Whether there is property that can be sold depends on whether the debtor has any non-exempt property. The debtor is allowed to keep a certain amount of property that the trustee and the creditors cannot touch. This is exempt property. Anything else is non-exempt. The trustee can take the non-exempt property, liquidate (sell) it, and distribute the proceeds to creditors who have valid claims. 

It is possible that a trustee could take possession of the debtor’s non-exempt property, but the case is dismissed for reasons that have nothing to do with the debtor’s assets. The debtor would lose property and still not get the benefit of a discharge. The worst of both worlds.

Chapter 13 Dismissal Issues

     Payment Plans That are Not Feasible

Chapter 13 cases are more complicated than Chapter 7 cases. They require that a payment plan be filed and approved by the court. Before it can be approved, the debtor has to show that all the debts that are required to be included are provided for and that the plan is feasible considering the debtor’s income and expenses. Often the debtor will file a plan with estimates for the claims of creditors, and the plan will have to be adjusted after the creditors file their claims. It is only after the claims are filed that the debtor will know how much she will be required to pay back with her plan payments.

If the plan is not feasible, confirmation will be denied. Without a feasible plan, the case will be dismissed.

     Failure to Make Payments

In a Chapter 13 case, the debtor is required to make payments under the payment plan to a trustee who distributes those payments to creditors holding proper claims. But the debtor is also required to keep current on her house payments, property taxes, income taxes and domestic support obligations like alimony and child support. If the debtor fails to keep any of those payments current, the court will dismiss the case at any time during the case, a discharge.

     Serial Cases

When a Chapter 13 case is dismissed, it is not unusual for the debtor to start the process again by filing a new Chapter 13 case. This happens often when the debtor has an interruption in income and cannot get caught up on required payments. When the debtor files a second case within a year of the dismissal of the first case, the automatic stay is only effective for the first 30 days. If the debtor wants to automatic stay to continue, she must file a motion to extend the stay with the court which usually requires that the debtor give testimony at a hearing to explain why the first case was dismissed and why the second case will succeed.

If the debtor has had two cases pending during the prior year, the automatic stay never goes into effect. The debtor who wants the effect of the stay will have to ask the court to impose the stay. Again, the debtor will have to give testimony and explain to the court why two cases were dismissed within the year and why the new case will succeed.