Debtors sometimes confuse the difference between a discharge and dismissal but they are two very different and distinct outcomes of bankruptcy.
A discharge means that all the requirements set by the court have been met by the debtor. In a Chapter 13 bankruptcy this means that all the debtor’s payments have been made in full and on time. For a Chapter 7 bankruptcy it means that all the creditors and unsecured debts listed in the bankruptcy petition (filed with the Court) have been wiped out. Once the case has been discharged creditors can no longer attempt to collect the debts owed to them. This allows the debtor a fresh start and he/she can move on without the burden of insurmountable debt.
Discharge Time Frame
A discharge usually happens more quickly in a Chapter 7 because assets are liquidated to pay creditors. A Chapter 13 discharge can take as long as three to five years because debts are partially repaid over that time according to the Court approved bankruptcy plan. A discharge is a favorable outcome for the debtor and is his/her goal for filing bankruptcy in the first place.
On the other hand, a dismissal is not the desirable outcome for a debtor. A dismissal happens more frequently in a Chapter 13 than a Chapter 7. A case can be dismissed for many reasons like not being able to afford the Chapter 13 payments because life circumstances have changed (i.e. job loss, etc.). In either type of bankruptcy, not completing required credit counseling and financial management courses could cause a dismissal as well as if the case was improperly filed. A case can also be dismissed for fraudulent reasons, i.e. excessive credit card abuse indicating that the debtor was trying to accumulate massive debt that he never intended to repay or property transfer to a relative just prior to filing.
Dismissal, Creditors and Credit Report
Once a case is dismissed, the automatic stay placed on the creditors that prevented them from being able to collect a debt is lifted, and the creditor may resume attempts to collect a debt. After a Chapter 13 dismissal the debtor cannot file another bankruptcy for 180 days. Whether your case is dismissed, discharged, or active all three statuses will show on your credit report.
One way to ensure a favorable discharge and not a dismissal is to convert a Chapter 13 into a Chapter 7 before it is dismissed. This can be accomplished by consulting your bankruptcy attorney who is familiar with the laws and procedures.