If Chapter 7 Is Denied Will Collections Start Over?

Automatic Stay

When you file for Chapter 7, the court issues an automatic stay against your creditors. This means that while the bankruptcy is in process, creditors cannot take collection action against you, including foreclosures and repossessions, as well as lawsuits, wage garnishments or even contacting you regarding the debt. However, if your Chapter 7 bankruptcy is dismissed, the court lifts the automatic stay and creditors can resume collection activity.

If a Chapter 7 bankruptcy is dismissed and you re-file within one year of the dismissal, the automatic stay may be limited to 30 days in your new case. This means that your creditors cannot take collection action during the first 30 days after you file for bankruptcy, but can resume collections activity after this point even if your bankruptcy has not yet been settled. This rule stops people from abusing the bankruptcy system by repeatedly applying for bankruptcy to stop creditors from taking collection activity against them.

If a debtor's Chapter 7 application is denied because he fails the means test -- i.e, he makes too much money or has too few expenses to qualify for Chapter 7 -- the debtor may refile for Chapter 13. Chapter 13 bankruptcy allows the debtor to make structured repayments on the debts rather than discharging them immediately through liquidation of assets. The automatic stay goes back into effect when the debtor refiles for Chapter 13 if the sole reason for the dismissal was the means test.

As of 2011, the bankruptcy court only dismisses Chapter 7 cases for three reasons: The debtor failed the means test; the debtor did not report debts correctly or tried to defraud the bankruptcy court; or the debtor did not keep adequate records of debt to support his case. Organize all paperwork and receipts before filing for Chapter 7 bankruptcy and consult a bankruptcy attorney if you have any questions about the bankruptcy petition or schedules to avoid dismissal, and report all your debts to avoid problems with incorrect reporting.