My colleague, Orlando bankruptcy lawyer Jonathan Alper, recently wrote about the rules for voluntarily dismissing a Chapter 7 case. Jonathan discusses the McDaniel case out of Florida, where the bankruptcy judge allowed a pro se debtor to dismiss a case after the debtor discovered that his tax debt was not dischargeable. The sole reason that the debtor had filed Chapter 7 was to discharge tax debt and the judge used "the court's discretion" to find that fairness and a lack of prejudice to the IRS warranted approval of the debtor's request to dismiss.
Over fifteen years ago, I was involved in a similar case, but one that yielded very different results. In my case, a gentleman came to see me after filing a pro se Chapter 7. He had filed the case to stop a payroll garnishment, and his total debt was around $100,000 – mainly credit cards. The problem he was facing had to do with his mother's home. Several years prior, his mother had added him to her deed for estate planning purposes. His mother continued to live in the home (which had no mortgage debt) and she paid the taxes and insurance. The mother's home had a fair market value of $200,000.
The Chapter 7 trustee ran a title search and found the real estate. The trustee wrote both the debtor and his mother to advise them that the trustee intended to sell the mother's house to liquidate the equity or that the mother could "buy out" the estate's interest by taking out a mortgage against the property.
The debtor came to me because he wanted to dismiss the case and to keep his mother out of the picture.
I looked at the Code section and saw that it gave the judge discretion to grant a motion to dismiss on the grounds of fairness, debtor's best interest and lack of harm to the creditor. I argued to the judge that it was fundamentally unfair to the mother to take her house and that the creditors (all unsecured) would be receiving a windfall because this debtor foolishly failed to seek counsel before filing Chapter 7.
The judge disagreed. She ruled that once the debtor filed Chapter 7, he gave up control of his estate and that by virtue of his title interest in his mother's house, he had equity in her real estate. We eventually settled with the trustee for slightly less than half the equity and the mother ended up taking out a mortgage on the property.
I have also been involved in a Chapter 13 in which the debtor received a large lawsuit settlement and the Chapter 13 trustee successfully moved the court for an order disallowing the voluntary dismissal of his Chapter 13 case.
The lesson here is that in my view, you cannot assume that a bankruptcy judge will permit you to dismiss your Chapter 7. I suspect that the debtor described by Jonathan Alper did not have any non-exmept equity and probably had a friendly judge. You cannot always assume that your judge will cut you a break. My feeling is that filing a bankruptcy without the advice of counsel is dangerous in general. A bankruptcy case can take on a life of its own and you may not be able to turn back the clock.
[tags] voluntary dismissal of chapter 7, judicial discretion, chapter 7 trustee, settlement with the Chapter 7 trustee [/tags]