Yes, listen to Alcove, when it comes to sound for the low budget filmmaker, few know more than him.
The big film festivals will require a multichannel mix, at least 3.0 but 5.1 is the standard. So a normal stereo mix will cause your film to be rejected, not from the selection process but the festival will not screen your film. Bare in mind we are only talking about the more major film festivals and yes, it is quite common for films to be rejected from festivals purely due to poor quality sound and even more so in the world of commercial film distribution and TV broadcast.
The other point to consider is the point which Alcove raised about perception and acoustics. You said you couldn't hear the jacket rustling during the dialogue (only the boom handling noise before and after the dialogue started). Ask yourself this question: Do you think you would be able to hear that rustling on a speaker which is 8ft high, costs about $20k, is placed in an acoustically designed and treated space and outputs roughly 1000 times more energy than your speakers? Bare in mind that cinemas will have between 3 and 5 of these giant speakers behind the screen (plus as many as 50 smaller speakers dotted around the walls and ceilings of the cinema). What sounds good to you on your laptop or even on good quality speakers is going to sound way more detailed and substantially different on a cinema sound system. In other words, the sound which your work colleagues thought was fine will probably sound worse in a decent cinema than you think the average poor quality home video sounds on your audio system.
OK, so the bad news is that cinemas represent the pinnacle of sound reproduction technology, to create a mix which sounds good on a cinema system takes a great deal of knowledge, skill and expensive equipment and the cost to filmmakers to hire the appropriate personnel and facilities is substantial. The good news is that your film will be compared to other films in the festival made by filmmakers like yourself, rather than to Hollywood blockbusters which have spent $5m or so on the sound. The other good news is that the standard of sound for the small regional film festivals is pretty dreadful and your example dialogue will almost certainly stand up to comparison even without any further processing.
The only point of concern is when you say you are looking to enter some of the big film festivals. The standard of sound for the big film festivals is much higher, still nowhere near as high as the Hollywood blockbusters but high enough to make your film with untreated sound appear poor in comparison. If you are set on exhibiting at the big film festivals then you are going to need Alcove and I (or other audio post pros like us) to sort the sound out for you.
You say you are relatively new to all this, to be honest if you are quite new maybe it would be a good idea to work on the smaller festivals to start with, where you can do the sound yourself and still stand up to comparison? If you're not familiar with the film festival circuit it will probably be much harder to get your film accepted for exhibition than you might expect and your financial risk would be much lower. Once you've got a few more shorts and a smaller festival or two under your belt, maybe then would be the best time to start thinking about the big festivals and upping your audio standards by hiring some experienced audio pros like alcove and me? From what I've understood of your posts so far, this probably represents the best advice I can offer but if you're still adamant that you want to go for some of the big festivals now, then I'll be happy to discuss working on your short if you send me a PM.
G
So my sound is good enough for the smaller festivals. Thats good to know