Most individuals are familiar with the term bankruptcy. It may sound like a great solution to anyone’s money problems. However, it is more complex than it appears.
In recent years, over half a million individuals in the United States have filed for bankruptcy. Most people are not familiar with the fact that there is a separate U.S. court system that handles only bankruptcy cases.
The United States Constitution authorizes laws governing bankruptcy. The United States Congress has passed and repeatedly amended those laws.
Bankruptcy courts have been established to help administer the bankruptcy laws. These courts are part of the federal court system in the U.S.
There are almost one hundred federal districts across the U.S. Each one maintains their own bankruptcy court.
Bankruptcy court judges have the authority to decide any matter that is connected to a bankruptcy case. This includes issues ranging from whether an individual is eligible to file bankruptcy to whether the debtor should be permitted to discharge their debts.
How is Bankruptcy Court Different from Other Courts?
Bankruptcy courts have authority over every aspect of a bankruptcy proceeding. As noted above, these courts are part of the federal court system. Similar to other courts, the decisions of bankruptcy judges are binding. There are, however, some differences between bankruptcy courts and other courts.
The main difference between a bankruptcy court and other courts is the role that bankruptcy courts play in a case. Most courts involve a winner or loser scenario, where an individual’s guilt or innocence is determined, as in criminal court, or a lawsuit is resolved and one party prevails, as in civil court.
Bankruptcy court, on the other hand, allows both parties to win in some way. The goal of a bankruptcy is to find a respectable midpoint between money owed by a debtor who is unable to pay and ensuring a creditor is paid what they are due.
Another difference between the courts is the appeals process. Bankruptcy courts were created by Congress and did not come from the Constitution. Therefore, the appeal process in a bankruptcy case begins at the federal trial court level instead of an appeals court.
Some circuits use Bankruptcy Appellate Panels (BAP) to handle bankruptcy appeals. These circuits include:
- The First Circuit;
- The Sixth Circuit;
- The Eight Circuit;
- The Ninth Circuit; and
- The Tenth Circuit.
Bankruptcy courts also have a smaller jurisdiction than other federal courts. In other words, they can only hear cases regarding core bankruptcy issues. If another issue arises during the bankruptcy, such as a modification of child support, the bankruptcy court cannot hear it. In contrast, federal trial courts may address non-bankruptcy issues that may arise, so long as no other restrictions apply.
What are the Different Types of Bankruptcy?
An individual can do themselves more harm than good if they do not file their bankruptcy correctly. The debt an individual is hoping to discharge may fall into an exception and not be dischargeable, depending on the type of bankruptcy filed.
The majority of bankruptcies are filed under the 3 main chapters of the Bankruptcy Code. These include:
Over half of individual consumer bankruptcy filings are Chapter 7 cases. This is one of the most common forms of bankruptcy filed.
In a Chapter 7 bankruptcy, or liquidation bankruptcy, the debtor liquidates, or sells, their assets to pay off their creditors. They may be able to keep certain exempt property.
However, there are certain exemptions which include debts that are non-dischargeable. For example, if the debtor engages in fraudulent behavior, such as concealing their financial records, their debts will not be discharged. In addition, there are other non-dischargeable debts, including:
- Student loans;
- Spousal support;
- child support, and
- Some taxes.
A Chapter 13 bankruptcy is typically used by individuals with higher incomes who wish to keep their property. This type of bankruptcy allows the debtor to make a repayment plan to satisfy their debts over time, usually 3 to 5 years.
A Chapter 11 bankruptcy is typically used by commercial enterprises to pay their debts. It permits the business to reorganize so that they may continue doing business. It may give them the ability to withdraw from certain obligations or contracts.
There are also some less common types of bankruptcy, which include:
- Chapter 9, which is a program that is similar to Chapter 11, but is only available to municipalities, which includes cities and towns;
- Chapter 12, which is a program that assists farmers and fisherman who maintain a regular income to keep their businesses and to repay their debts over a number of years; and
- Chapter 15, which is a program that helps with insolvency across different countries. Military personnel living abroad would qualify under Chapter 15.
Should I Use a Petition Preparer for Bankruptcy Court?
A petition preparer is a service that will arrange and complete any forms that are required for bankruptcy court. An increasing number of individuals have begun using petition preparers to assist them in getting ready to file for bankruptcy. It is important, however, to examine whether or not it is a good idea to use these services.
The bankruptcy court itself strongly recommends that every filer hire their own bankruptcy lawyer when filing for bankruptcy. The laws in bankruptcy are very technical. A simple mistake can affect a debtor’s rights or even cause their case to be thrown out of court.
It is important to note that petition preparers are not lawyers. They are not permitted to provide any legal advice.
This includes difficult questions such as which property should the filer exempt and basic questions such as what type of bankruptcy should the filer choose. In other words, the filer must understand the bankruptcy process themselves and represent themselves in bankruptcy court.
If an individual absolutely does not want to consider hiring an attorney, hiring a petition preparer may be helpful. An experienced petition preparer may be able to generate the necessary documents quickly and easily.
A petition preparer may be a great help for an individual preparing to file for bankruptcy if they do not have the time or knowledge to fill out their own paperwork. A petition preparer may also charge a lower fee than an attorney. However, they will be able to provide no assistance other than filling in the blanks on paperwork.
Why Should I Hire a Bankruptcy Attorney?
Although an individual is permitted to represent themselves in bankruptcy court, the court strongly recommends they have an attorney. Partnerships and corporations are required by law to have an attorney when filing for bankruptcy.
Many individuals choose to represent themselves but it is a choice that may cost them in the long run. As previously noted, bankruptcy rules are technical and one mistake may severely affect an individual’s rights.
For example, if the individual is unaware a document is necessary or forgets to file it, their case may be dismissed. In addition, bankruptcy cases are audited randomly to check for the completeness of the information provided. If an individual’s case is audited and their information was inaccurate, they may be prosecuted for bankruptcy fraud.
Do I Need an Attorney?
Yes, it is essential to have the assistance of an experienced bankruptcy attorney. There are a number of hidden dangers in bankruptcy cases and it is not uncommon for an ordinary citizen to lose their case because they were unaware of a local court rule or a requirement that they be the one to schedule a hearing.
It may seem that hiring a lawyer is not a good financial decision when you are already so far in debt. However, a lawyer can be your best chance at discharging your debts and getting back on your feet.