Avoiding Legal Trouble

What Happens If Your Chapter 7 Bankruptcy Gets Dismissed Instead of Discharged?

The majority of Chapter 7 bankruptcies, which individuals use to ask for total debt relief, go off without a hitch. After the paperwork is filed, it's usually just a matter of some routine meetings and a short waiting period while the trustee goes over everything. Then you're granted a discharge and a clean start. What happens, however, if the bankruptcy is dismissed instead? This is what you need to know.

What's the difference between a bankruptcy discharge and a dismissal?

A discharge finalizes your bankruptcy. You are no longer legally liable for any of the debts that were forgiven in the bankruptcy. A dismissal means that the court found a problem with your case and decided not to discharge your debts—which means that you still owe all your creditors, and they are free to pursue you for those debts. In addition, any automatic stays that you were under that stopped garnishments out of your wages or shut-offs on your utilities are gone. This can immediately put you in a very bad financial situation.

Why would the bankruptcy trustee do that?

Bankruptcy trustees have to protect the integrity of the court—which means that they can be strict about anything that makes it seem like you were trying to get around some of the bankruptcy rules. In some cases, the problem may be poor paperwork skills on your part. If you guessed at some numbers or forgot a personal debt that you owed your aunt, that could make it look like you're trying to play games with the law. It's also possible you simply forgot to file one of the required forms or missed a small fee that had to be paid.

On major cause for dismissals is failing to go through the credit counseling requirements that are now part of bankruptcy law. Even if your bankruptcy came about through an unavoidable disaster—like an extended medical condition, hospital stay, and job loss—you're still required to go through the credit counseling. In addition, the counseling has to be done by an agency that's been approved by the United States Trustee's Ofice.

What do you do if your bankruptcy has been dismissed?

First, you need to determine whether your bankruptcy was dismissed with or without prejudice. If it is dismissed without prejudice, you can file again right away—however, you want to make sure that you understand exactly why the bankruptcy was dismissed and take corrective action promptly because you'll only be granted an automatic stay of your debts (and any collection efforts or shut-offs) for 30 days.

If your bankruptcy was dismissed with prejudice, you have a much more serious problem. You're essentially accused of trying to abuse the system, and that means that you are barred from filing again for a minimum of 180 days. However, the trustee can actually impose an even longer mandatory waiting period if he or she so desires. He or she can also prohibit you from discharging certain debts at all, even in a subsequent bankruptcy.

If this happens, you need to consider filing an appeal right away—consult with your bankruptcy attorney immediately because you usually only have 14 days to file a Notice of Appeal. 

While most bankruptcies do go through smoothly, you can help ensure that yours does as well by making sure that you follow your bankruptcy attorney's instructions carefully every step of the way. Comply with all requests from the bankruptcy court even if they don't really seem to apply to you. For more information, talk to an attorney, such as one from Reppe Law Office, today.