Bankruptcy Dismissal vs. Discharge: What's the Difference?

When a party files for bankruptcy, they can choose between Chapter 11, commonly known as reorganization bankruptcy, Chapter 7, a liquidation bankruptcy and Chapter 13, wage-earner's bankruptcy.

Filing under Chapter 11 allows the debtor to retain control of the business and make payments to their creditors. Chapter 7 forces a closure and liquidation of the business. The proceeds from the debtor's bankruptcy estate, their remaining assets, are then distributed to their creditors. Chapter 13 requires individuals with a steady income to form a plan to repay all or some of their debts.

The terms "dismissal" and "discharge" refer to actions that occur in a bankruptcy case.

A bankruptcy dismissal is the court’s dismissal of a bankruptcy case. A bankruptcy discharge is the court’s forgiveness of the debtor from debts incurred prior to filing for bankruptcy protection. When a court dismisses a bankruptcy case, it typically does not issue an order to discharge the petitioner’s debt. This means the debtor remains in debt.

A dismissed bankruptcy on a credit report means that the bankruptcy case has ended, and the debtor has not paid their debts. Creditors can pursue them for payment. A dismissed bankruptcy will have a negative effect on a person or on a company’s credit. A dismissed bankruptcy remains on a debtor’s credit history for seven to 10 years.

On the other hand, a discharged bankruptcy on a credit report means that the debtor has satisfied, or paid, their debts to creditors. Their lenders cannot pursue them for payment. A discharged bankruptcy can have a positive effect on a person or a company’s credit score.

A person or company may request a voluntary dismissal if they are not prepared for the proceeding; if the debtor and the creditors have reached an agreement regarding payment; if the court tells the debtor one or more of their debts cannot be discharged; or the debtor finds a job or another source of funds to repay their creditors.

A debtor does not have an absolute right to voluntary dismissal. The court can deny a dismissal if the debtor seeks the dismissal in bad faith. A debtor may be acting in bad faith if they used the automatic stay granted at the time of their bankruptcy petition filing to transfer funds so that they would not have to pay a creditor.

The party that filed for bankruptcy moves for a voluntary dismissal when they want to dismiss their bankruptcy case. A debtor may want to dismiss a case if the reorganization plan for a Chapter 11 bankruptcy does not meet their needs. Parties that oppose the bankruptcy case, such as creditors, may move for an involuntary dismissal if the debtor failed to meet certain requirements, such as attend the meeting of creditors. The court may also order an involuntary dismissal.

• ‌Voluntary dismissal‌: The court chooses whether to approve the dismissal depending on the chapter of the bankruptcy (for example, Chapter 7 or Chapter 11), and the debtor’s prior history in bankruptcy.
• ‌Involuntary dismissal‌: The court orders the dismissal or approves it because parties other than the debtor showed good cause for a dismissal. A trustee, an administrator assigned by the bankruptcy court to oversee the case as it proceeds through the process, can move for a dismissal.

When the court allows a voluntary dismissal, the debtor can lose their right to an automatic stay in a future bankruptcy case. An automatic stay is a period during which creditors cannot collect debts. This usually begins when the debtor files for bankruptcy.

A dismissal typically involves the court stopping all proceedings in the main bankruptcy case as well as in all adversary proceedings. An adversary proceeding is a separate lawsuit filed in the bankruptcy case.

For example, a creditor who alleges that a debtor is engaging in fraud or breach of contract can file an adversary proceeding in a debtor’s Chapter 13 bankruptcy case.

The closing of a bankruptcy case occurs when all of the activity in the main bankruptcy case has ended. This means the court has ruled upon all motions. If the court appointed a bankruptcy trustee, the trustee has filed a statement that they have completed all trustee duties.

Trustee duties include distributing the assets of the bankruptcy estate to creditors. A bankruptcy estate is the debtor’s estate in a bankruptcy case. It includes legal interests, such as funds, and equitable interests like shares in a company.

Closing does not mean the court entered a discharge. The exception is if all the activities related to determining discharge have been completed.

Even if a bankruptcy case closes, a debtor, trustee or creditor can ask the court to hear motions and enter orders in the case. A party must file two motions to get this to occur. First is a motion to reopen the bankruptcy case, which the judge may or may not set for a hearing.

Such a motion requires a filing fee, which differs in Chapter 7, Chapter 11 and Chapter 13 cases. The judge will usually rule on this motion before considering any other motions.

If the judge grants the motion to reopen, the party can file a second motion. This is usually a motion to avoid a judgment lien, a court order that gives a creditor the right to take possession of the debtor’s property.

Alternatively, a second motion may be to extend the time to file Form B 23, the debtor’s certification of a course concerning personal finance management. If the purpose of reopening the case is to allow the filing of the certification of completion of the course, the party should attach Form 23 to the first motion.

The judge may allow Form 23 to be filed without the debtor having to file a second motion and without conducting a second hearing.

A conversion of a bankruptcy case involves the court approving a change of the case from one type of bankruptcy chapter to another chapter. For example, the court may convert a Chapter 11 case to a Chapter 7 case. A debtor, trustee or creditor may request a conversion or the court may order conversion on its own.

The court may automatically approve a conversion. It can also disallow a conversion. Sometimes, the court may require a hearing to approve a motion to convert.

In some ways, conversion has the effect of restarting the bankruptcy case because the debtor and the creditor have different rights and duties depending on the particular chapter of bankruptcy.

A discharge releases the debtor from certain debts, such as loans entered into before the bankruptcy case began. Certain debts, like alimony and child support, cannot be discharged. Typically, a court will automatically discharge debts unless there is litigation that requests that the court not do so.

The timing of a discharge differs depending on the chapter under which the case is filed. In a Chapter 7 case, the court usually grants the discharge after the time to file a complaint objecting to discharge and the time for filing a motion to dismiss the case for substantial abuse expire.

This is 60 days following the first date set for the 341 meeting, defined as a meeting with creditors. The creditors' meeting usually takes place about four months after the debtor files for bankruptcy.

In individual Chapter 11 cases and Chapter 13 cases, the court usually grants the discharge as soon as practicable after the debtor completes all payments to creditors under the plan. A Chapter 13 case typically provides for payments to be made over three to five years.

The discharge usually occurs about four years after the date of filing. The court may deny an individual debtor’s discharge in a Chapter 7 or Chapter 13 case if the debtor does not complete an instructional course concerning financial management.

A bankruptcy attorney can help an individual, a married couple or an entity such as a business filing for bankruptcy by advising them on the law and assisting them with paperwork.

A bankruptcy lawyer can also represent a party in court if they make a motion such as a motion to reopen. Court employees and bankruptcy judges cannot offer legal advice to a debtor.

Actions that a bankruptcy attorney can take include:

• Recommending the best chapter of bankruptcy to file.
• Explaining the tax consequences of filing bankruptcy.
  
• Explaining how bankruptcy will affect the credit of an individual, a married couple or a company.
  
• Determining whether a debtor should continue to pay their creditors.
  
• Advising a party as to whether their debts can be discharged.