Filing for Bankruptcy is a big decision but once a debtor files their bankruptcy case, it cannot be voluntarily withdrawn without Court permission. There are a number of factors that the Bankruptcy Court must evaluate before a debtor is permitted to voluntarily dismiss a Chapter 7 Bankruptcy case. Generally, a debtor can only withdraw their Chapter 7 bankruptcy if they have a valid reason and the circumstances rise to a level deemed to be “good cause.” Additionally, the debtor must show the Court that creditors will not be prejudiced by the dismissal of the case and that the dismissal is in the debtor’s own best interests.
Obtaining The Bankruptcy Court’s Permission To Voluntarily Dismiss A Chapter 7
In order to obtain permission from the from the Bankruptcy Court to withdraw a case voluntarily, the debtor must make a motion pursuant to 11 U.S.C § 707(a). In general, the Court will deny a debtor’s request for dismissal unless there is a compelling reason and the debtor can demonstrate that they have the ability to pay their creditors outside of bankruptcy. The Court will determine whether cause exists by examining whether a dismissal would be in the best interest of all parties concerned. As part of the determination, the Court will weigh the equitable factors involved in granting the debtor’s request.
In the first part of the analysis, the Court must find that dismissal is in the debtor’s best interest and will evaluate whether the debtor is still able to secure a fresh start. A voluntary dismissal may not be appropriate when a debtor does not have the ability to pay his creditors if the case is dismissed. Conversely, a debtor who is able to make arrangements to pay creditors outside of bankruptcy may have cause for dismissal. The debtor’s best interests include not only obtaining a fresh start, but also taking into account the administrative expenses that are associated with bankruptcy.
In the next part of the analysis, the question of what is in the creditors’ best interest typically hinges on whether they would be prejudiced by allowing the case to be withdrawn. In a motion to voluntarily dismiss a Chapter 7 bankruptcy case, the debtor bears the burden of proving that dismissal would not prejudice the creditors in the case. Creditors may be prejudiced where the debtor obstructs and delays and then moves to voluntarily dismiss the case only after a considerable amount of time has past. In general, a bankruptcy case will not be dismissed, if the purpose of filing the petition was simply to forestall the collection efforts of creditors. While creditors will be able to exercise their rights in state court once the case has been dismissed, keeping the case open provides a benefit to all creditors who file claims and not just the ones who are able to sue the debtor the fastest in state court (this is often referred to as the “race to the courthouse”).
Another factor that the Court will consider is whether there are any non-exempt assets owned by the debtor that can be distributed to pay the creditors in the case. The moment a Chapter 7 Bankruptcy petition is filed, the debtor’s non-exempt assets become property of a bankruptcy “estate” which is under the control of an appointed bankruptcy trustee. It is the duty of the bankruptcy trustee to sell the debtor’s non-exempt property in order to pay the debtor’s unsecured creditors. If a debtor files a Chapter 7 Bankruptcy with a non-exempt asset, the creditors will be prejudiced by the withdrawal of the Chapter 7 bankruptcy, because the creditors may not necessarily receive any money if the case is dismissed. A Bankruptcy Court will typically not allow a debtor to dismiss their case unless it can be shown that there is an alternative way to satisfy the creditors. If you would like to know more about what assets can be kept in a Chapter 7 bankruptcy case, please see:
What Is “Good Cause” To Voluntarily Dismiss A Bankruptcy?
While there are relatively few examples of what constitutes “good cause” under bankruptcy caselaw to voluntarily withdraw a Chapter 7 Bankruptcy case, below are a few examples where the balancing of the equitable factors in the case lead the Bankruptcy Court to allow for a voluntary dismissal:
- A debtor who does not sign the petition and who does not delay is bringing a motion to dismiss their case;
- A pro se debtor who was not aware of what they were doing due to circumstances out of their control;
- A debtor who has a religious exception to bankruptcy after a consultation with clergy.
Conversely, here are some examples of situations where the debtor’s request for dismissal would be denied:
- A debtor who seeks to hide assets or fails to disclose improper transfers of assets;
- A debtor who is solely seeking to hinder the prosecution of a state court collection action;
- A debtor who has acted in bad faith and has abused or manipulated the bankruptcy process for their benefit and their creditor’s detriment;
- A debtor who brings a motion to dismiss after years of litigation in the Bankruptcy Court.
Converting to Chapter 13 When Withdrawal Is Not An Option
Even if the Bankruptcy Court denies a debtor’s motion to voluntarily dismiss their Chapter 7 bankruptcy, the debtor may be able to convert their case to a Chapter 13 bankruptcy. Unless the debtor is attempting to convert their case in bad faith, the Courts will typically allow a debtor to convert to Chapter 13 if they have regular income and can show that they can afford the payments required in a Chapter 13 bankruptcy plan. However, if a debtor who has converted their Chapter 7 bankruptcy to Chapter 13 then seeks to withdraw the converted case, they will find their case converted back to a Chapter 7. The converted Chapter 13 case cannot be used indirectly to get a debtor’s Chapter 7 case dismissed or withdrawn. If you would like to know more about Chapter 13 bankruptcy, please follow this link:
If you have any questions about filing for bankruptcy, please feel free to contact the Law Offices of David I Pankin, PC at 888-529-9600 or by using our easy online contact form. We have been helping debtors file bankruptcy for over 20 years.
In Re Segal, 527 B.R. 85 (Bankr. E.D.N.Y. 2015)
In re Bruckman, 413 B.R. 46 (Bankr. E.D.N.Y. 2009)
Schwartz v. Geltzer (In re Smith), 507 F.3d 64 (2d Cir. 2007)
In re Hull, 339 B.R. 304 (Bankr. E.D.N.Y. 2006)
In re Schwartz, 58 B.R. 923 (Bankr. S.D.N.Y. 1986)
In re Klein, 39 B.R. 530 (Bankr. E.D.N.Y. 1984)