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U.S. Supreme Court rules bankruptcy judges may resolve disputes

Bankruptcy might be the right option for people struggling with personal debt, particularly when they face unexpected financial challenges. A liquidation proceeding, known as Chapter 7, is one option to be considered. Many families get a fresh start through this legal process without undue delay. For those with additional legal issues, disputes might need resolution in order for the bankruptcy proceeding to continue.

The Supreme Court of the United States has handed down a decision that may influence these types of cases going forward. The important background information to note is that bankruptcy judges are appointed by federal judges. In place for set terms, they aren't sitting under Article III of the U.S. Constitution. Up until this current decision, bankruptcy judges were limited to ruling on matters under the Bankruptcy Code.

The case before the Court reportedly involves the Chapter 7 bankruptcy of an individual who filed his petition in 2009 because a judgment of $655,596 was entered against him by a former business partner. The partner-creditor reportedly won the bankruptcy judge's declaration that a trust with about $5 million in assets actually belonged to the debtor, thereby becoming part of his bankruptcy estate. Records show on appeal, his trust ownership was determined to be a state law matter and outside the bankruptcy court's jurisdiction.

By a 6-3 ruling, the Supreme Court reportedly ruled that U.S. bankruptcy judges have the authority to decide disputes that are not subject to the bankruptcy law. Alleged breaches of contract are an example. Justice Sotomayor clearly stated, however, that the parties have to understand and voluntarily consent to adjudication in the bankruptcy court. She noted in her opinion that barring these judges from deciding these matters could cause the federal judiciary to come to a standstill. According to reports, Chief Justice Roberts dissented with a 20-page opinion and warning that the ruling threatens the judiciary's independence.

Every bankruptcy case is different because debtors' circumstances are unique. With skill, experience and knowledgeable application of bankruptcy law, it's possible an advocate can navigate any complex issues and bring about a positive outcome.

Source: Reuters, "Supreme Court ruling endorses role of bankruptcy judges," Tom Hals, May 26, 2015

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