Updated January 2022
Thorough tenant screening is an essential part of your process as a landlord, but just going through the motions isn’t enough. You need to dig deep into what comes back on each report. For one thing, it will benefit you to know what a bankruptcy dismissed vs discharged history means.
Are you familiar with one or both of those terms?
Bankruptcies on a tenant background check can have one of two dispositions: dismissed or discharged. As a landlord, it’s key to know what each type of bankruptcy means. Otherwise, you won’t get an accurate picture of a potential tenant, nor will you have a picture of their financial health.
Don’t miss out on potential warning signs. Today, use our guide to learn more about the major differences between the two types of bankruptcy when found on tenant background checks.
Table Of Contents: Bankruptcy Discharged vs Dismissed
Without prior knowledge, many assume that dismissed and discharged bankruptcies are the same thing. The reality, however, is that there are major differences between the two. Landlords will benefit from understanding what has occurred in each financial situation when screening tenants. Get started on learning more:
- What’s Bankruptcy, And Why Should Landlords Care?
- Bankruptcy Dismissed vs Discharged: What’s The Difference?
- Bankruptcy Dismissed And Discharged FAQs
- An Eye To The Past And Future
Why is it important for landlords of all experience levels to understand bankruptcy, what it entails, and what it says about a potential tenant?
Bankruptcy is a legal process used by businesses and individuals who cannot pay their debts. Through this process, they can either discharge their debt or create a plan to pay off their debt in a certain period. There are different types of bankruptcy, and the exact terms of any bankruptcy filing vary depending on the specifics of the situation and who files for bankruptcy.
Bankruptcy creates a situation where debts that cannot be paid are no longer the debtor’s responsibility, while also ensuring that the creditor gets back some or all of their money. This payment typically happens through liquidating the debtor’s assets, but the exact circumstances can vary.
Before getting into the details of dismissal and discharge bankruptcy terminology, consider how bankruptcy can affect your business. If a potential tenant has a bankruptcy show up on their background check, that says a few specific things you should be aware of.
Potential tenants who have filed a motion for bankruptcy in the past may have difficulty following through on their financial obligations. This isn’t always true, but bankruptcy doesn’t happen out of nowhere in most situations.
It’s best to request any information the tenant is willing to share about their financial obligations that led to the bankruptcy. Additionally, you will want to confirm through bank statements or pay stubs that the tenant can currently afford to make rent. Ensure the employment is permanent, not seasonal, before confirming that the tenant is presently financially stable enough to rent your unit.
If possible, contact any previous landlords listed on the rental application. Talk with them to confirm that the tenant followed through on their tenant obligations while renting in the past. Individuals who have filed for bankruptcy may not have been able to keep up with their lifestyle, which could impact how they act as renters. Finding out directly from a previous landlord can help to ease any concerns you may have in this regard.
Though filing for bankruptcy is not a good thing to need to do, it is often a step taken by individuals who are aware they are in over their heads. By wiping their debts away or making plans for repayment, the individual shows their devotion to improving their financial situation long-term.
What does their credit look like right now, despite the bankruptcy?
If their credit is still relatively strong or it has been more than two years since the bankruptcy was filed, it’s best to consider the rest of the rental application with a higher priority. Most landlords agree that older bankruptcies don’t say much about how a tenant will currently act.
Are you still feeling uncertain?
Look at the tenant’s credit history, if possible, and pay attention to their payments. Are they making payments on time? Is their credit improving at a steady rate? If so, the applicant has likely improved their financial methods since the bankruptcy, and they could make a fantastic tenant now.
Applicants with bankruptcy in their past are aware that they may not be a landlord’s first choice. They may offer special considerations to convince you to take their application seriously.
This means that you, as the landlord, will need to decide what types of concessions you will and will not make.
For example, collecting a larger security deposit may help you feel more secure in the financial risk you are taking by renting to this individual. Alternatively, you may ask this type of applicant if they have anyone who can co-sign on the lease to ensure a lower risk.
Regardless, there is more that you likely to need to do when considering applicants with bankruptcies in their credit history.
It’s up to you to decide about each applicant. Learning more about the circumstances of their bankruptcy is a great way to start painting the picture you need to see to make that decision.
Now that you know why bankruptcies matter when doing tenant screening, it’s time to get into the nitty-gritty of a bankruptcy dismissed vs discharged.
What’s the difference between these two bankruptcy outcomes?
In the simplest terms, a dismissed bankruptcy indicates that a change occurred during the filing process that led the bankruptcy to be dismissed.
On the other hand, a discharged bankruptcy shows that the bankruptcy is no longer a debt on the individual’s record.
When a bankruptcy has been dismissed, something happened during filing that stopped the process. This means that the bankruptcy filing was never completed, and no debt resolution was completed through a bankruptcy process.
There are many potential reasons for a bankruptcy filing to be dismissed; here are just a few of them:
- Applicant reconsidered filing in the first place; decided to stop the process
- Applicant provided false information to the court/trustee; documents were not processed
- Applicant failed to provide necessary information to the court/trustee; process was not completed
- Applicant failed to attend credit counseling
- Applicant failed to make payments as agreed (for a chapter 13 bankruptcy)
The specifics of why a bankruptcy was dismissed may not show up on the credit report. In most cases, however, the particulars of a dismissed bankruptcy may or may not be important to your tenant search. Though the bankruptcy was never filed or carried out, the reasons for that may still be a red flag. Make sure to use the rest of the credit report to get a more complete picture of the applicant’s financial health.
When a bankruptcy has been discharged, this means the applicant is no longer required to pay any of the debts that have been included. The creditors can no longer try to collect on these debts or communicate with the applicant about them. The debts have been ‘erased,’ and the applicant is no longer personally liable for any debts included in the discharge.
Some types of debt, however, are never included in discharges:
- Child support or alimony payments
- Condo fees
- DUI debt
- Personal debt to people/properties for damages caused
- Student loan debt
The individual may still be responsible for a payment plan or other types of payments related to this bankruptcy. Still, the original debts can no longer be collected after a discharge.
Depending on the landlord’s standards, either filing may be a warning sign.
We’ve seen some landlords who were comfortable with dismissed bankruptcies on tenant background checks, while others see it as a sign of financial trouble. We wrote about finding bankruptcies on tenant screening reports previously, so we suggest you check out that article for more information.
Remember that according to the FCRA, bankruptcies are only reportable for 10 years from the date of filing.
Despite the differences between dismissed and discharged bankruptcy, it’s still helpful information to have when considering applicants. If you don’t look into an applicant’s financial history at all, you could be completely blindsided by how things turn out.
This is just one of the many reasons thorough and accurate tenant screening is essential to complete. Landlords can get assistance from high-quality services such as the tenant screening packages at RentPrep, to gain the most precise picture of a potential tenant’s background and current financial health.
With this information, you can make better, more informed decisions about which tenant to sign a rental agreement with.
A tenant filed bankruptcy can come with many caveats. Here are just a few.
When viewing a credit report, you might not immediately be sure about whether or not a bankruptcy case is closed. It’s essential to look at the listed dates on the report to understand its status. Usually, the report will include the month and year that the bankruptcy petition was filed and when the bankruptcy was closed.
If you cannot parse out this information, you may be able to ask the applicant directly or search public records to see if you can get a little more insight.
The best tenant screening services that provide this type of information will clearly present the information so this doesn’t need to be challenging to figure out. Be sure to work with a high-quality company to get this type of service.
As mentioned, dismissed bankruptcy vs discharged are two very different things on a credit report. Dismissed bankruptcies did not result in any debt relief. Instead, the petition was not completed for one reason or another. As such, it can mean a variety of things.
In some cases, it means that the individual filing for bankruptcy changed their mind. In others, they did not do things properly and were not granted a discharge.
If a bankruptcy is dismissed, the court will not discharge the debts or continue with the petition. This means that the individual will continue to be liable for their debts, and the creditors can continue collecting on any remaining debts.
Dismissed bankruptcies can be refiled, but there may be limitations on when an individual can do so.
For example, bankruptcies dismissed without prejudice can be refiled immediately. This happens when everything was done in good faith, but something was filed incorrectly or not included as it should have been. Once that information is updated, the petition can be refiled.
However, suppose an individual lied, failed to provide proof of certain aspects, or otherwise disrupted the bankruptcy process. In that case, they may need to wait a minimum of 180 days to refile.
When reviewing a tenant application that includes a dismissed bankruptcy, consider how long it has been since the dismissal and whether or not it is likely the tenant will be refiling soon.
When a dismissed bankruptcy is a chapter 13 bankruptcy, things are a little more interesting than some of the other types of bankruptcy dismissals.
A chapter 13 dismissal can occur for many reasons but may be more concerning in some cases. For example, a chapter 13 dismissal may occur because the debtor cannot continue the repayment plan that is part of the original decision. This would void the bankruptcy and cause a dismissal. The creditors would be able to continue collecting on the original debts.
If you see a chapter 13 dismissal on a tenant’s record, this could mean they have trouble sticking to their financial commitments. Make sure to review all of the other information received carefully to make this determination before selecting a tenant.
When reviewing bankruptcy on background checks, you might wonder if a tenant can hide bankruptcy. However, you’ll be glad to hear that even dismissed bankruptcies remain on credit reports. Depending on which chapter bankruptcy was filed, the history will remain for either seven or 10 years. This ensures that creditors receive accurate information about an individual’s financial record through the credit report.
It might not make a huge difference whether you’re considering a potential tenant with a bankruptcy discharged vs dismissed. Ultimately, only you can decide how much it matters to you if a tenant has a dismissed vs discharged bankruptcy record.
In most cases, it’s best to think about several factors:
- How long ago was the bankruptcy?
- How has the tenant handled their financials since that time?
- Do they have a solid rental history otherwise?
- Is there anyone who can cosign on their rental agreement?
By thinking critically about these questions, you should be able to determine if any type of bankruptcy history will be a deciding factor when moving forward with a rental applicant. If you do decide to move-forward and are looking for more insight into a specific tenant, be sure to check out RentPrep’s tenant screening services today!