How to Drop a Bankruptcy

By Tom Streissguth

Filing for bankruptcy is a last resort attempt to improve your financial health. Bankruptcy protects you from lawsuits and creditors, and results in the discharge, or cancellation, of most debts. The filing will do serious damage to your credit rating, however, and make it more difficult to qualify for a loan. If your finances improve while you are in bankruptcy, and you no longer need the legal protections, you can request that the court dismiss your case.

Reasons for Dismissal

Several good reasons exist for dismissing a bankruptcy case, including an improvement in your financial situation due to a new job offer, a loan from a friend or relative to pay off your debts, or a sudden windfall like an inheritance. You may discover that your largest debts cannot be discharged through bankruptcy, such as tax debts, student loans and child support. Or, you may decide that it's better to work things out with your creditors than to force them to write off your debts. Of course, dismissing the bankruptcy doesn't undo the damage caused by filing the initial petition. That event remains on your credit report for at least 10 years.

Voluntary Motions

If you wish to close your bankruptcy case, you must file a Motion for Voluntary Dismissal. The court will not grant the dismissal automatically; the motion is subject to the approval of the court and trustee, and the clerk will set a hearing on the matter. Your creditors have the right to appear at the hearing to object to the dismissal. You must show the judge that you are capable of paying your debts, in full, and have not filed the motion in bad faith, for example, to avoid the loss of your assets or beat your creditors out of their claims.

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Chapter 13 Dismissals

A Chapter 13 bankruptcy allows you to make a partial repayment of your debts with a plan set up by a court trustee. The plan continues for three to five years, and pays unsecured creditors an average of about 20 percent of their claims. As long as you continue making monthly plan payments, the bankruptcy case stays open. If you want to dismiss the case, you must file a request for dismissal; the dismissal is granted as long as the trustee and the court agree to it. If you stop making plan payments, your case is subject to an involuntary dismissal.

Re-Opening the Case

If the court grants your dismissal and then you change your mind, you can petition to have the case re-opened. You have a limited window of opportunity to take this step, however. If the deadline passes, the case is dismissed "with prejudice." This means that you would have to file a new claim and qualify for a second chapter 7 filing according to federal law, which restricts repeat filings. Remember that a dismissal is not the same as a discharge, so once a bankruptcy case is dismissed, all your debts become due in full once again, and creditors can take all legal steps to recover their money.

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What Happens When Chapter 13 Is Dismissed?


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