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What to Know About Limited Formal Proceedings

Limited Formal Proceedings

Bankruptcy court is a subset of the Federal judiciary, following explicit bankruptcy court rules, and as such proceedings within are legally binding. Bankruptcy court is certainly no joke. Moreover, appearances before the court do not happen for free. With bankruptcy court filings, unless more extreme circumstances present themselves, there are fees attached to both the filing of the case and its administration.

The pressures and constraints behind bankruptcy court may indeed be quite worrisome to debtors. That said, there is the potential for a considerable amount of informality in the officiation of bankruptcy court rules with specific regard to how concerned parties are given notice of the proceedings, how creditors submit their claims, and whether or not bankruptcy court filings must be made at all.

The following are considerations on how the bankruptcy court rules may be bent, if only slightly:

It stands to reason that bankruptcy court filings must come from all parties directly affected by the matters at hand in the case. This implies that creditors have their own motions and documents to file. Most importantly, for lenders to be considered as beneficiaries of official bankruptcy cases, they must submit a proof of claim with the designated bankruptcy court.

There are specific bankruptcy court rules that govern bankruptcy court filings themselves. However, even when creditors are negligent of this information, a judge may deem an "informal proof of claim" acceptable if it is put in writing, holds the debtor to a financial obligation, and is fair to all involved.

While bankruptcy court rules for the most part are established by the Federal justice system, the latitude of proofs of claim are an indication of the court's discretion in these matters, which may prompt some debtors who feel they were treated egregiously to appeal their decision. Another discretionary ruling may be applied to the receipt of notice that proceedings are, in fact, to happen. Despite the absence of notices to creditors, even informal statements from debtors that bankruptcy court filings have already been made must be investigated by the court to see if they (the debtors) should be protected by an automatic stay.

Especially in the case of businesses, bankruptcy court filings may indeed be too costly for debtors, and the debtors may indeed be insolvent, but they may not have enough money to provide settlements to claimants, or may otherwise find formal bankruptcy proceedings unappealing. In this context, some debtors may choose to move forward with private settlements. For both creditors and debtors, though, this is a risky prospect. As these engagements are not subject to normal bankruptcy court rules, there is the risk of misinformation or criminal misrepresentation, and what's more, this may be more difficult to prove in a court of appeals.

NEXT: What You Should Know About Bankruptcy Appellate Panel

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