What is Bankruptcy Court?

U.S. bankruptcy court refers to specialized federal courtrooms in the United States. The federal government created bankruptcy courtrooms to settle all types of personal and corporate bankruptcy cases.

Unlike the federal court, which the U.S. Constitution established in 1781, the bankruptcy court system did not exist until 1978, when Congress established the system as part of the Bankruptcy Reform Act.

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Bankruptcy

How Bankruptcy Court Works

While most criminal, civil, and family cases are heard in state courts, bankruptcy must be filed in a federal court. The laws that govern bankruptcy are part of federal law, not state law, so in order to start bankruptcy proceedings, an individual must work within the federal court system.

Key Takeaways

  • Bankruptcy courts are part of the federal court system.
  • Bankruptcy court judges serve 14-year terms on the court bench.
  • It is possible to end up in bankruptcy court if you can't afford to pay your debts.
  • Company owners sometimes file bankruptcy to reorganize their debts and financial obligations without losing their business.

There are 94 federal judicial districts throughout the United States, and each district has a bankruptcy court. Federal law requires that a bankruptcy case be filed and heard in the judicial district that is the primary residence, place of business, or site of the principal assets of the filer. Though the cases take place within individual states, the Federal Rules of Bankruptcy Procedure govern the bankruptcy process, in order to maintain consistency from state to state.

The United States Court of Appeals appoints bankruptcy judges, who serve 14-year terms. Proceedings of a bankruptcy court are public unless a judge rules that they remain under seal, and can be accessed at a bankruptcy clerk's office or through the Public Access to Court Electronic Records also called PACER.

Procedures in Bankruptcy Court

Bankruptcy itself refers to an instance in which a person or business cannot repay their debts. Once the debtor files the petition, the following proceedings are decided by the bankruptcy courts. The court measures and evaluates the debtor's situation, and then returns a process and plan for how the debtor’s assets may be used to repay a portion of outstanding debt.

Bankruptcy courts also make extensive use of video and audio conferencing facilities because it is impossible to assemble creditors from different parts of the country into a single room at the same time.

The decision is overseen by a bankruptcy judge, and that judge is able to decide whether or not the debtor should be discharged of their debts. This means that the debtor will no longer be responsible or personally liable for the debts associated with the filing. However, some debts are ineligible for discharge, including tax claims, child support, alimony payments, and personal injury debts.

An individual also cannot be discharged from any debt on any secured property, and any creditor can still enforce a lien on a debtor’s property. 

Special Considerations

If an individual or creditor disagrees with the bankruptcy judge’s decision and wishes to contest the judge’s ruling, the filer has the option of filing an appeal and beginning the appeal process. 

The appeal is generally made by individuals or businesses that have standing in the decision or are directly affected by it. A bankruptcy court decision incorporates multiple claims made by creditors, who can claim "financial injury," and are directly affected by it.

For example, the appeal may be the result of a creditor's claim not be honored or disputed by the bankrupt business or individual.

The appeal must be filed within four weeks of the bankruptcy court's decision. An appeal court generally handles bankruptcy appeals. In fact, there are many judicial circuits that have their own bankruptcy-specific appellate courts to handle such disputes.

Examples of Bankruptcy Court Cases

Bankruptcy court filings can be triggered by various circumstances in a person's life. For example, an individual may rack up credit card debt that may be too high for them to service. Depending on their circumstance in life at the time of filing, a bankruptcy court may provide a ruling that they could wipe away their debts.

Another example is the case of an individual who has monthly mortgage payments that are too high for them to service. A bankruptcy filing may help bring down their monthly commitments and make it manageable.

In the case of businesses, bankruptcy courts can help facilitate the reorganization of a company under Chapter 11 bankruptcy.