When discussing literary precision, Huckleberry Finn author Mark Twain is reported to have said that the difference between crafting the right word and the almost right word was similar “to the difference between the lightening and the lightening bug.”
Well, while it is certainly not as colorful a metaphor, the difference between chapter 13 dismissal and chapter 13 discharge is just as massive. Indeed, the only things that they have in common are that they (obviously) both pertain to chapter 13 bankruptcy, and (just as obviously) both start with the letter “d.” But that is where the similarities end, and as such it’s critical for individuals contemplating a bankruptcy filing to understand the differences now — not later.
What is Chapter 13 Bankruptcy?
Before exploring dismissal vs. discharge, it may be helpful to quickly summarize how a chapter 13 bankruptcy filing works. Unlike a chapter 7 filing that typically wipes out most (and in many cases all) debts, chapter 13 is essentially a 3-5 year structured repayment plan.
Some of the advantages of filing for chapter 13 bankruptcy include:
• Trustees may be somewhat flexible on the terms of payment, which could mean that debtors have more time to pay and/or pay lower and more affordable amounts.
• Debtors can maintain ownership of assets (e.g. cars, property, etc.) while they’re being repaid.
• Once the repayment plan is fulfilled, creditors cannot demand to be paid in full.
• If another major financial setback occurs, debtors can file for chapter 13 two years after a discharge (or any time after a dismissal).
What is Chapter 13 Dismissal?
One of the unique entitlements of a chapter 13 bankruptcy filing is that petitioners have the option to dismiss their own case. Essentially, doing so voids the filing. If they wish (and they usually do), creditors can then immediately start or continue to pursue collections activity or litigation, provided that they abide by prevailing laws. Any money paid to creditors during the now-voided bankruptcy filing are applied against the original debt, but interest costs and other fees that were previously subject to an automatic stay can recommence.
In light of the above, it’s fair to ask why anyone would want to dismiss their own chapter 13 bankruptcy filing, since the financial consequences are quite significant. The answer is that in some cases, the costs of dismissal in the bigger picture are less than those that would be incurred by continuing with the filing.
For example, an individual who is behind on his mortgage, car payments and owes back taxes to the IRS files chapter 13 bankruptcy. As part of the filing, he submits a 3-year repayment plan that is accepted, and which allows him to keep his home and car, and stop the IRS from garnishing his wages. While the situation is not ideal, the 3-year window to pay down his debts is a “lifeline” that would otherwise not be available outside of a bankruptcy filing.
After the first year, the petitioner obtains a much better paying job, and also receives a significant amount of money through an inheritance. The extra income and windfall enables him to dismiss the filing and pay off his debts (or at the very least, pay them down in a way that prevents creditors from taking collection action or filing litigation).
What is Chapter 13 Discharge?
A chapter 13 discharge occurs when a petitioner completes all payments as prescribed by the repayment plan. In addition, the petitioner must:
• have completed and approved course in personal financial management;
• have not received a discharge from chapter 13 bankruptcy in the last two years, or a discharge from chapter 7, 11 or 12 bankruptcy in the last four years; and,
• does not have any outstanding domestic support obligations (if applicable).
In addition, the court must be satisfied that there is no pending proceeding that could impact the debtor’s homestead exemption.
Once the discharge is approved, the debtor is released from the debts noted in the repayment plan, and creditors governed by the plan cannot start or continue any action, legal or otherwise, to collect any debts.
To learn more, contact the Law Office of Charles H. Huber today. We will give you the facts you need to determine if filing for bankruptcy is in your best long-term financial interest. We have over 30 years of filing consumer bankruptcy cases. Our experience is your advantage, and we are here to help.