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.

• 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

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.

3) Eligibility

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.

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.

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

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.

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

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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