Bankruptcy – Dismissal vs. Discharged

According to the Administrative Office of the US Courts, Bankruptcy filings increased by 16.8% in 2023, encompassing both business and individual filings. Bankruptcies are now the sole public records appearing on credit reports, as the credit bureaus (Experian, Trans Union, Equifax) stopped reporting liens and judgments a few years ago. A common question we receive concerns “dismissed” bankruptcies and why they still appear on credit reports, despite not being completed or discharged.

Let us begin with the various types of bankruptcies:

  • Chapter 7 – This is total liquidation of all assets, meaning that once the bankruptcy is discharged the consumer owes the creditors nothing, unless there are creditors that have been “reaffirmed.” A reaffirmed debt in most cases is going to be a mortgage. A Chapter 7 will remain on a credit report for 10 years from the filing date.
  • Chapter 11 – This was originally intended for large corporations, but some small individual business owners can now file as well. This allows businesses to continue to operate while they reorganize their debts. This can stay on a credit report for 10 years.
  • Chapter 12 & 13 – These are similar in that in both Chapters a consumer gets to keep everything, and they are both repayment plans. In most cases the consumer is only paying back a percentage of what is owed. The major difference is that Chapter 12 is specifically for farmers and fishermen. These stay on a credit report for 7 years from the filing date.

What happens if a bankruptcy is dismissed rather than discharged? There are typically two reasons for a bankruptcy dismissal. First, the consumer might decide not to proceed with the bankruptcy and request a Voluntary Dismissal from the court. Second, the court might dismiss the case for various reasons: incomplete paperwork, non-payment of court filing fees, failure to complete required credit counseling classes, ineligibility, or detection of bankruptcy fraud, such as hidden assets or dishonesty about finances. Regardless of the reason for dismissal, the consumer remains responsible for their debts, and creditors can continue collection efforts.

If a bankruptcy is dismissed, it will still appear on the credit report as “Dismissed.” Since filing for a bankruptcy is a public record, even a dismissed file will be shown on a consumer’s credit report for 7-10 years, depending on the chapter filed. A dismissal impacts a credit score as significantly as a discharged bankruptcy, potentially lowering the score by over 100 points based on the overall credit profile.

It is important to keep in mind that when bankruptcy is filed, creditors are notified and may flag the account accordingly. Even if the bankruptcy is dismissed, the account may still show the bankruptcy flag and related remarks, though the debt remains due. It’s crucial for consumers to check their credit reports post-dismissal to ensure accounts are accurately reported. While the bankruptcy will still appear under public records, creditors should not list the bankruptcy remark, except in the case of mortgages. Mortgage companies often retain the bankruptcy flag on the account for protection, even if the mortgage is reaffirmed or the bankruptcy is dismissed.

While a bankruptcy is not the end of the world, filing for bankruptcy, whether discharged or dismissed, can have serious repercussions on credit scores. Both notations will affect credit as long as they remain in public records, an important consideration for anyone contemplating bankruptcy.