Bankruptcy Dismissal

Most bankruptcy filings are voluntary, and the requirements are few and simple. Hence, most anyone can file for bankruptcy, whether it would be in their or their creditors' best interest or not. However, without the information in the bankruptcy petition, it is not possible to screen petitioners to determine if bankruptcy is the proper remedy. Instead, if there is something wrong with the petition, or if there is evidence of bad faith or abuse of process, or it is evident from the petition filed that bankruptcy would not be the best solution for the petitioner, the court can dismiss the case.

The dismissal of a bankruptcy case ends it, including most of the legal consequences of the bankruptcy filing, but without giving the debtor a discharge of his debts. The debtor and his bankruptcy estate are released from bankruptcy, the automatic stay is ended, and the creditors are free to pursue their collection remedies outside of bankruptcy.

There are some remedies that provide an alternative to a dismissal of a case, and may be a better option. One alternative is a conversion to another chapter of bankruptcy, which may be more appropriate for the circumstances, or because it is required by law. Abstention is another alternative to dismissal, when the court refuses to take on a case because either it would be unfair or because it would be more appropriate to defer to another court.

A dismissal of a bankruptcy case can be sought by the debtor, trustee, creditor, or other party in interest. However, certain requirements must be met to obtain a dismissal—even the debtor does not have an absolute right to dismiss his own case in some circumstances.

A major cause for dismissal under any chapter of bankruptcy is when the bankruptcy petition or the petitioner does not comply with the requirements mandated by law. For instance, an individual debtor must have received credit counseling from an agency approved by the U.S. Trustee and the certificate issued by the agency must be submitted with the petition; otherwise the debtor's petition will be dismissed.

Each chapter of bankruptcy has a section stating the grounds for dismissal under that chapter:

These grounds fall into 3 broad categories: voluntary dismissal, dismissal for cause, and bad faith or abuse of process.

Voluntary Dismissal

The right for the debtor to dismiss his own case is not absolute under Chapter 7 and 11, or under a chapter converted from 7 or 11, unless the debtor can show cause. This requirement to show cause is to dissuade debtors from using the bankruptcy process for other than what it was intended for. For instance, in years past, debtors whose homes were going to be foreclosed would file bankruptcy to stop the foreclosure by the automatic stay that began as soon as the debtors filed the petition. The debtors would then dismiss their case, so that the lender would be forced to start the process that often lasted several months all over again, only to file again on the eve of foreclosure.

On the other hand, the right to dismiss under an unconverted Chapter 12 or 13 is an absolute statutory right and can be done at any time during the course of the case.

Creditors who file an involuntary Chapter 11 petition against the debtor can also seek to dismiss their case. A notice must be sent to all parties in interest for a court hearing to determine whether the dismissal should be granted. However, even if the petition was filed in good faith, if the debtor does not consent to the dismissal, then the creditor may be liable for costs and damages. Compensatory and punitive damages could be awarded in a bad faith filing.

Voluntary Dismissal Under Chapter 7 Bankruptcy

Sometimes a debtor will want to dismiss their Chapter 7 bankruptcy because they have received money during their case and hope to improve their credit history (it won't!) or they thought that their home would be protected and discovered that it wasn't. Any bankruptcy dismissal may actually worsen the debtor's credit score because the debts listed in the bankruptcy petition will not be discharged and the bankruptcy filing itself will remain on the debtor's credit reports. Even if the debtor suddenly came into money, it may still be better to get the discharge—then the debtor can use the money for a fresh start, which is 1 of the 2 main objectives of bankruptcy. Read Credit Availability and Credit Scores After Bankruptcy for more information.

Whether a court will grant the debtor a voluntary dismissal depends on the following factors:

  1. whether all creditors have consented;
  2. whether the debtor is acting in good faith;
  3. whether the dismissal would result in a prejudicial delay in payment;
  4. whether dismissal would result in a reordering of priorities;
  5. whether there is another proceeding through which the payment of claims can be handled; and
  6. whether an objection to discharge, an objection to exemptions, or a preference claim is pending.

Source: In re Susan Glenn Hopper

Note that if there are funds available in the bankruptcy estate or if a dismissal will result in a delay of payment to creditors, then the motion to dismiss will probably be denied. Courts will not usually grant a dismissal simply because the petitioner made a mistake either in understanding the bankruptcy process and its consequences—not even if the petitioner was represented by an attorney! Even if the debtor becomes able to repay all of his debts is not a sufficient basis for granting a dismissal, especially if the source of funds is from his family and not from another steady source of income. The courts will generally weigh the overall benefit of dismissal to both debtor and his creditors to reach a conclusion.

Tip: If you wanted to dismiss your case because you discovered that you were going to lose your home, then consider converting your case to Chapter 13. Under Chapter 13, you can keep your home and get more time to pay any arrearages on your mortgage and you may be able to pay less on your other debts, which will make the mortgage payment more affordable. Note, however, that while a debtor who filed an original Chapter 13 petition can dismiss her case voluntarily at any time, a Chapter 13 debtor who converted from a Chapter 7 case will have to attend a hearing and give good cause for the dismissal. (More info: Chapter 13 Bankruptcy Overview)

Dismissal for Cause

Cases under all chapters of bankruptcy can be dismissed for cause, and is the only grounds for dismissal by a party who is not a petitioner. A dismissal for cause requires a notice and a hearing. Factors supporting a cause for dismissal include defects in the bankruptcy case, such as improper prosecution, fraud, or because of prejudicial delays by the debtor or the debtor's lack of cooperation.

A dismissal for cause in the rehabilitative bankruptcies—Chapter 11, 12, and 13—is also supported by the debtor's inability to either confirm a payment plan or to pay according to a confirmed plan. A creditor can move for dismissal if it is unlikely that the debtor will be able to carry out a payment plan; however, courts will generally give the debtor a chance at first, but continued failure will increase the likelihood that the court will dismiss the case at a later date.

Bad Faith or Abuse of Process

The court or the U.S. Trustee can also move for dismissal if the debtor does not provide the necessary information to prosecute the case, or if the debtor does not cooperate, or perform other duties to close the case, such as taking the debt management course required for individual debtors before they can receive a discharge.

A case can also be dismissed if it does not comply with law. For instance, if a debtor who filed for Chapter 7 fails the means test because his net income after subtracting necessary expenses is too high, then he may have to convert his case to a Chapter 13 case; otherwise, his filing will be presumed abusive, and his case may be dismissed, unless he can rebut the presumption of abuse.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) has also imposed a new duty on the Chapter 13 petitioner, requiring that all tax returns to have been filed by the day before the creditors meeting with the appropriate tax authorities for the previous 4 years, so that they can file a proof of claim. Properly filed tax returns are also necessary to have a payment plan confirmed under Chapter 13. If any tax return has not been filed by the creditors meeting, then the court can either dismiss the case or convert it to Chapter 7.

A court also has broad authority, provided by §105(a), to dismiss a case sua sponte (on its own motion, without responding to someone else's motion) if the court believes that the debtor is abusing the process.

Consequences of Dismissal

Generally, the dismissal of a bankruptcy case does not prevent the debtor from filing another petition for bankruptcy. However, to prevent repetitive serial filings by individual debtors, Congress added §109(g) which prohibits individual debtors and family farmers from filing a subsequent case for 180 days after dismissal if the case was dismissed because the debtor failed to comply with court orders or make a required appearance to prosecute the case, or if the debtor voluntarily dismissed the case after the creditor filed a motion to lift the automatic stay. This last provision was added to prevent debtors from filing for bankruptcy each time a secured creditor was going to foreclose on its collateral.

Ordinarily, dischargeable debts that were not discharged in the dismissed case can be discharged in a later case. However, in cases of egregious bad faith, the court may dismiss a case with prejudice, preventing the debtor from discharging debts in the dismissed case in a later bankruptcy.

After dismissal, all avoided transfers are reinstated, and any money or property recovered for the benefit of the bankruptcy estate is returned. Any money paid by the debtor to the trustee for distribution to creditors, but that was not yet distributed at the time of dismissal, will be paid back to the debtor.

There are some consequences of the bankruptcy filing that are not reversed. Rejected executory contracts or leases are not revived. Parties who acted in good faith during the bankruptcy will also generally be protected. This includes any good faith parties who purchased property from the bankruptcy estate, or who received distributions of money or property according to a confirmation plan.

Dismissal of Bankruptcy Will Lower Your Credit Score and Make It Harder to Obtain New Credit

One other item that is not reversed by a dismissal is the listing of the bankruptcy filing in your credit reports, even if you voluntarily dismiss the case. The listing of the bankruptcy filing will remain for 7 years from the filing date or 10 years for a Chapter 7 filing, and it will have a significant effect on your credit score for at least 2 years. Because the debts of a dismissed case are not discharged nor is the listing of the filing prevented by a dismissal, it is almost always a bad idea to seek a voluntary dismissal, even if one can be obtained.

On the other hand, receiving a discharge of your debts will improve your credit score because the discharged debts are eliminated. Creditors will also know that you will not, in most cases, be able to file again for at least several years, reducing the risk that any extended credit will be eliminated in a subsequent bankruptcy. Furthermore, the discharged debts cannot be listed for more than 7 years after they are discharged, even for a Chapter 7. If your case is dismissed, then the listed debts can remain on your credit report for at least 7 years after the accounts are closed, which could be long after your dismissal, greatly lengthening the amount of time that the accounts remain in your credit files, where they will greatly lower your credit score.