Does Bankruptcy Fall Under Federal or State Jurisdiction?

Millions of people file for bankruptcy protection every year throughout the country, including Pennsylvania and New Jersey. Most filers do not understand how the process works. A common question that many potential filers ask is, “does bankruptcy vary state to state, or is it the same everywhere?” Bankruptcy is governed by federal law. Therefore, across the board, most bankruptcies are very similar. However, certain aspects are governed by state law, such as exemptions. Additionally, bankruptcy courts also have local rules and regulations. For example, there are procedural differences between the Eastern and Western Districts of Pennsylvania.

Bankruptcy offers filers relief from their debt and a means to move forward on firmer financial ground. However, navigating the process requires an understanding of federal law and the local rules and regulations. Just because an attorney is familiar with the Bankruptcy Code does not mean they know the nuances of the local district. At Young, Marr, Mallis & Associates, our skilled attorneys are well versed in federal law and the local bankruptcy rules of the Pennsylvania and New Jersey Districts.

Nonetheless, the Bankruptcy Code is a federal law. This makes sense when you think about it. Businesses and individuals across the county file for bankruptcy every day, and they work with creditors across state lines. Additionally, when a discharge is entered, the order needs to be given full faith and credit in every state. If this was different, a debtor might be required to obtain state judgments in multiple states or jurisdictions. At Young, Marr, Mallis & Associates, our experienced Philadelphia bankruptcy lawyers are familiar with the federal law and the local and state laws of Pennsylvania and New Jersey. To further understand the bankruptcy process, call (215) 701-6519 in Pennsylvania or (609) 755-3115 in New Jersey.

What is Federal Jurisdiction?

Jurisdiction refers to what court has the authority to hear a legal case and decide what happens. In the United States, two main court systems could have jurisdiction over a legal dispute. State courts include the individual state and municipal courts, including small claims court and family court. The Federal court system includes the United States Supreme Court, the Courts of Appeals, tax courts, and bankruptcy courts. Typically, a court will have jurisdiction over a case through personal or subject matter jurisdiction. For example, you would not file a car accident case in family court. However, a case that starts in state jurisdiction could move up to the federal level if the subject matter has national implications. Before filing your case, our knowledgeable Allentown bankruptcy lawyers will determine the appropriate court.

The Role and Structure of Federal Courts

Once you understand that there is a significant difference between federal and state jurisdiction, it is important to discuss the role and structure of the federal court system to understand where the bankruptcy court fits.

The federal judiciary is separate from the legislative and executive branches of government but often works in concert with them. Congress drafts and passes federal bills, the President signs them into law, and the federal judiciary decides if the laws are constitutional.

The Supreme Court

The highest court in the United States is the Supreme Court. It was created under Article III of the U.S. Constitution. Article III also authorized Congress the power to establish a system of lower federal courts. Currently, the federal court system consists of 94 district trial courts and 13 courts of appeal.

Courts of Appeals

The 13 appellate courts sit below the Supreme Court. Furthermore, the U.S. Courts of Appeal are organized in 12 regional districts. The role of the appellate courts is to decide if lower trial courts applied the law correctly. The appellate courts consist of three judges and does not utilize a jury to determine facts. These challenges come from decisions rendered by lower federal courts within the regional circuit and regional federal agencies.

Bankruptcy Appellate Panels

Each federal circuit established Bankruptcy Appellate Panels (BAP) to hear appeals of decisions rendered by the district bankruptcy courts. These panels consist of three authorized judges. While it is possible, a dispute will rarely occur in a consumer bankruptcy case that will work its way up to a BAP.

The District Courts

There are 94 U.S. District Courts. Most people are familiar with the way a district court functions. These courts are tasked with determining the facts and applying the law to resolve legal disputes. Federal trial courts consist of a judge to oversee the case while a jury renders the decision.

There is at least one district in each state, though many have more. Pennsylvania has three districts, the Eastern, Middle, and Western District, while New Jersey is one federal district.

U.S. Bankruptcy Courts

Federal courts have jurisdiction over bankruptcy matters and disputes. This includes all personal and business bankruptcies. It is impossible to file a bankruptcy case in a state court. Bankruptcy courts oversee the bankruptcy process, allowing businesses and individuals to either discharge or pay their debts through court-supervised liquidation or reorganization.

State Court Matters in Bankruptcy Court

In some bankruptcy cases, matters that were being addressed in a lower state court could have a significant impact on a debtor’s case. For example, a debtor might have been a party in a contractual dispute that was being litigated in state court at the time of the filing. The bankruptcy filing stayed the state court proceeding. However, the plaintiff in the case alleged that the debtor was guilty of criminal fraud. Because the outcome of the state court case would impact the dischargeability of the debt in question, the plaintiff filed an adversary complaint in the bankruptcy case. Basically, the plaintiff is requesting the bankruptcy court to decide the matter. Depending on the circumstances, the bankruptcy judge could hear the case or remand it to the state court to decide the outcome.

State Residency Requirements for Filing For Bankruptcy

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was enacted. This law amended the existing bankruptcy law, implementing new requirements and regulations for bankruptcy filers. One of the new additions was a reworked residency requirement. Under BAPCPA, a bankruptcy filer must have resided in the state they wish to file in for at least two years.

If bankruptcy is governed by federal law, why does the state a filer lives in matter? The bottom line is money and assets. When someone files for bankruptcy, their cash, savings, and assets become part of the bankruptcy estate. The Bankruptcy Court has jurisdiction over the bankruptcy estate and could liquate it to pay a filer’s creditors. The only thing protecting a debtor’s property are the available federal and state exemptions.

Every state in the union has its own unique set of exemptions. In most states, a bankruptcy filer is required to use the state exemptions. However, 20 states, including the District of Columbia, permit a debtor to elect to use the federal exemptions instead of the state exemptions. Both New Jersey and Pennsylvania give filers this choice.

In states where an election is allowed, the debt must choose one complete set of exemptions. Picking and choosing is prohibited. In many cases, the federal exemptions are more generous than the state protections.

BAPCPA requires that a filer reside in a state two years before taking advantage of the state’s unique exemptions. For debtors that have lived in more than one state over the two-year period, the amended Bankruptcy Code states that the state where the debtor lived for 180 days before the beginning of the two-year period governs. Therefore, even though bankruptcy is governed by federal law, exemptions are determined by the state in which you reside.

These changes were added to BAPCPA because Congress wanted to curtail abusive practices by bankruptcy debtors. The objective was to deter filers from forum shopping or relocating to a state because if offered more beneficial exemptions. Many debtors were moving to adjacent states to protect a greater proportion of their property or lower their bankruptcy payments.

Exemption Exception – State Laws and Bankruptcy Cases

Bankruptcy courts are governed by federal law. This means that federal judges preside over cases and attorneys are required to follow the federal rules of procedure. In most cases, the court will be housed in a different building than other local courts.

One exception is that state law governs what exemptions could be used in a bankruptcy case. Exemptions are a set of laws that allow a bankruptcy debtor to protect their property from liquidation to pay their creditors. For example, under the federal exemptions, a homeowner is permitted to protect $25,150 of equity in their house. There are two types of bankruptcy exemptions available in a case: federal and state exemptions.

As stated above, the federal law has a set of exemptions available for some bankruptcy filers. Currently, only fifteen states and the District of Columbia utilize these exemptions. Every other state has its own set of exemptions. Some states, including Pennsylvania and New Jersey, allow a debtor to pick which set of exemptions they wish to use. However, a debtor must choose one or the other – you are not permitted to mix state and federal exemptions – even when it would benefit your case.

In most cases, the federal exemptions are more generous and afford debtors greater protections. However, there are times when a filer might need to use a state exemption. For example, under the federal exemptions, a homeowner is allowed to protect $25,150 of equity in their home. If a person does not have a mortgage or only has a small remaining balance, then the federal exemption will not protect their house. Pennsylvania has a “tenants in the entirety” exemption. Under this exemption, a creditor is not permitted to have a lien against a property that is jointly owned between spouses if only one spouse owes the debt. Therefore, if all your debt is only in your name and you own your home with your spouse as “tenants in the entirety,” you can exempt the entire property, even if there is no mortgage. Our experienced New Jersey bankruptcy attorneys will review your case to determine which set of exemptions will allow you to protect your property and assets.

Local Bankruptcy Rules

The Bankruptcy Code does not address every aspect of a bankruptcy filing. Therefore, under the Bankruptcy Code, each district court is permitted to amend or make rules governing the procedures and practices within the district bankruptcy court’s jurisdiction. These rules and regulations must be consistent with federal laws.

For example, if you file a Chapter 13 case to stop a mortgage foreclosure, your case would be handled differently in the Eastern District of Pennsylvania than it would in the Western District. To be more specific, if you filed in Philadelphia, you would continue to make your regular monthly mortgage payment directly to your lender. The money you are behind will be paid through your bankruptcy plan. Debtors in Pittsburg, or the other side of the state, would pay both their mortgage and the money they are behind through the bankruptcy plan. This is only one of the many small procedural rules and regulations that make each district slightly different. It is important to have one of our experienced Pennsylvania bankruptcy attorneys who are familiar with the local rules of the district where your case will be filed.

Call Our Pennsylvania or New Jersey Bankruptcy Attorneys for a Free Consultation

While bankruptcy is governed by federal law, your case will be impacted by various local rules and regulations. If you are considering filing for bankruptcy or just have some questions, call our experienced Bucks County bankruptcy lawyers at Young, Marr, Mallis & Associates. Our New Jersey number is (609) 755-3115, while in Pennsylvania, you can reach us at (215) 701-6519.