Dismissing Chapter 7 Bankruptcy Cases
Sometimes things don’t work out as planned. As in life, so goes bankruptcy. You don’t always get a “do-over” in bankruptcy.
A Typical Bankruptcy Pattern
You filed your Chapter 7 bankruptcy case, probably without an attorney because you thought you couldn’t afford an attorney and, perhaps, didn’t think you needed one.
Then things went wrong and now you want to back out of your case.
One of the most important factors to consider before filing a bankruptcy case is whether any assets (property) will be at risk when you file.
Most people who can qualify prefer to file Chapter 7 because it does not require any repayment plan, so it is quicker and less expensive than other Chapters.
In a Chapter 7 case, assets are only protected up to the amount of exemptions provided for under the state or federal law applicable in your case.
In Chapter 13 and Chapter 11 cases, you get to keep all your assets but must pay out the non-exempt value to your creditors over time.
One thing any good bankruptcy attorney does is prepare for different problems that may arise in any case.
Surprise: The Bankruptcy Trustee is Trying To Sell My Home and Other Assets!
Let’s say you own a house that you believe is worth $250,000 and there is $175,000 owed against it. You took your $75,000 homestead exemption allowed under California law to protect the equity and assumed everything was fine when you filed your Chapter 7 bankruptcy case.
Then the Chapter 7 trustee tells you he’s going to seek to sell your home because he believes he can get more than $300,000 for it.
You start to panic and realize you don’t want to be in bankruptcy anymore. You want your case dismissed so the Trustee won’t sell your home.
Can you just dismiss your bankruptcy case and walk away undamaged?
Dismissal is Not Automatic in Chapter 7
It would be nice if you could just click the heels of your ruby slippers a few times and get out of problems in a Chapter 7 case, but it’s not that easy.
You can file a Motion to Dismiss your case, but the criteria the judge will use in deciding whether to let you out of the Chapter 7 is whatever is in the best interests of your creditors.
Thus, as you can imagine, if the Trustee can sell your house to get money to pay your creditors, your creditors are going to be better off than by allowing you to dismiss your bankruptcy case in the hopes that you will pay them something in the future.
I have successfully gotten judges to dismiss Chapter 7 cases, but it is not that common and really depends on the facts.
Most often in this scenario, the judge will not allow you to dismiss your Chapter 7 case. If you stay in Chapter 7, you will lose the non-exempt assets. You can, however, assuming you are eligible, convert your case to Chapter 13 or Chapter 11 and prevent the loss of any assets.
Other Reasons to Dismiss a Chapter 7
Losing assets is not the only thing that can lead one to want their Chapter 7 case dismissed. There can also be issues with the Trustee suing recipients of money you’ve either repaid or given away in the past few years (this can, and often does, include relatives).
Be Ready To Switch to Chapter 13 or Chapter 11
This article is not at all intended to discourage people from filing Chapter 7 bankruptcy. As I have written about before, in the vast majority of Chapter 7 cases, you get to keep all your assets and there is no problem or issues with transfers. This results from proper planning and analysis by an experienced bankruptcy attorney. But as there are always variables beyond control, you always need to be prepared for alternatives.
This is another reason why it is important to have an experienced bankruptcy attorney and why it is important to follow their guidance and be forthright in disclosing information to them, so they can properly assess the risks and position you to be able to convert your case to a different Chapter if things don’t work out.
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