The “Absolute” Right to Dismiss a Bankruptcy Case

July 18, 2012

Very rarely does it make sense to dismiss a bankruptcy case. A bankruptcy debtor has several options when financial circumstances change, including converting the case to another chapter. For instance, if a large medical bill is incurred after a Chapter 7 case is filed, the debtor could petition the bankruptcy court to convert the case to a Chapter 13 and include the medical bill.

Sometimes it makes more sense to dismiss the bankruptcy case altogether.

A bankruptcy debtor cannot ordinarily dismiss a Chapter 7 case. Once the debtor has attended the trustee’s meeting (also called the “341 meeting of creditors”), the case generally proceeds to discharge. If a debtor “forgets” about an asset, or is surprised by a large income tax refund, the trustee can compel the debtor the debtor to turn over the asset to pay creditors. The debtor cannot simply dismiss the case and keep the money.

On the other hand, a Chapter 13 debtor is generally able to dismiss the bankruptcy case almost as a matter of right, as long as there is no “bad faith” involved in the dismissal.

An example of a “bad faith” situation can be found the case of In Re Kotche, filed in the US Bankruptcy Court in Maryland. The trustee in that case objected the confirmation of the debtor’s Chapter 13 plan and asked the court bankruptcy judge to convert the case to Chapter 7. In response the debtor asked the court to dismiss the case. The issue in the case was the value of the debtor’s jewelry, which she listed at $50. However, the debtor’s ex-husband testified included a diamond wedding ring set with a separately purchased center-diamond stone of 3.64 karats, a tennis bracelet, two diamond bracelets, a diamond necklace, a watch, and a cocktail ring. Kotche also failed to list a baby grand piano. Oops!

The bankruptcy court found that Kotche had not been complete or forthright in her bankruptcy paperwork, and found that her motion to dismiss was brought in bad faith. In other words, she was dishonest and wanted out of bankruptcy when she was discovered. The bankruptcy court said that Kotche could not be kept in Chapter 13 against her will, but that she did not have an absolute right to have her case dismissed:

“There is no indication that Section 1307(b) is intended to provide the dishonest debtor a right to misuse the protections of a bankruptcy case and then escape with impunity. Such result would permit abusive practices and render null and void any judicial power to prevent or protect against such fraudulent practices…”

Bankruptcy is meant to provide the “honest but unfortunate debtor” with a fresh financial start. Kotche wanted a “head start” by keeping her expensive assets and discharging her debts. The bankruptcy court refused her motion to dismiss and converted the case to Chapter 7.

When a financial change occurs in your bankruptcy case, discuss the matter immediately with your attorney. Dismissal of your case should only be considered as a last option. You and your counselor will review your options and determine a course of action that is in your best interest.
 

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