Bankruptcy Court

What Is Bankruptcy Court?

U.S. bankruptcy court refers to specialized federal courtrooms in the United States. The federal government created bankruptcy courts 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 it as part of the Bankruptcy Reform Act. The U.S. Bankruptcy Code has been amended numerous times since then.

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.

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 site of the primary residence, place of business, or 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.

On Sept. 1, 2021, Judge Robert Drain, of the U.S. Bankruptcy Court in White Plains, N.Y., approved a $4.5 billion settlement of the Chapter 11 bankruptcy of OxyContin manufacturer Purdue Pharma LP. The settlement dissolves Purdue Pharma and creates a new public benefit company charged with funding opioid-addiction treatment and prevention. It shields the former owners, the Sackler family — who will pay $4.5 billion, over nine years, including federal settlement fees — from legal claims related to the opioid epidemic. Purdue also agreed to release 30 million documents related to the case.

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 can occur when 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.

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. Some debts, however, 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.

Bankruptcy courts 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.

Can You Appeal a Bankruptcy Court Decision?

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.

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

The appeal must be filed within ten days 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. An individual may, for instance, rack up credit card debt that may be too high for them to pay back and file chapter 7 bankruptcy. 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 chapter 13 bankruptcy filing may help bring down their monthly commitments and make the payments manageable.

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