Understanding Bankruptcy Courts

Bankruptcy court building
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Bankruptcy affects more people than you probably realize. It has been said that over a lifetime, a person has a one in ten chance of filing a bankruptcy case. It's almost guaranteed to have affected some of your neighbors, co-workers and even the members of your Sunday School class. Even if you have not filed a case yourself, you might have been a creditor of someone who did or perhaps your employer filed. According to the United States Court, 767,721 individuals filed for bankruptcy in 2017 — almost 62% of these were Chapter 7 filings.

When you are affected by a bankruptcy case, you may be confused and frustrated about the process. This article will help quell some of that frustration by explaining how the bankruptcy court system works.

What is Bankruptcy?

Bankruptcy is a process governed by federal law. It is a procedure designed to provide financial relief to people or organizations experiencing the overwhelming burden of debt, ultimately ceasing all collection activity on the part of creditors. This means once someone declares bankruptcy, a creditor can no longer take any action against the debtor for the outstanding debt.

Individuals have two options to file for bankruptcy. The first is Chapter 7, which allows you to have all your debts discharged after liquid assets are used to repay some of the debt. You can only file for this type of bankruptcy if you pass a test proving that your income is lower than the average income for your family in your home state. If you don't pass this test, then you must file for Chapter 13. Through this option, you repay a portion of your debt in a three- to five-year payment plan. These payments are made directly to the courts.

Businesses may also file Chapter 11 bankruptcy, which gives them the opportunity to reorganize and restructure through a court-appointed trustee. Through a Chapter 11 bankruptcy, the company will come up with a plan to deal with its creditors. This plan is subject to approval by the bankruptcy court.

A bankruptcy will stay on your credit history for at least seven years. So this should be the last resort to absolve yourself of your debt after all other avenues have been exhausted.

Where are Bankruptcy Cases Heard?

Bankruptcy cases can only be heard in federal courts. Although there are proceedings under the laws of various states called "receivership," the unified bankruptcy courts are all federal, whose system is divided into levels:

  • Trial courts
  • Appellate courts
  • Supreme Court

There are also various administrative law courts like the immigration court.

The basic trial court is called the district court. Bankruptcy courts are specialized courts that are, in essence, a division of the district courts. District courts can hear all matters that come within their jurisdiction, plus they can hear bankruptcy matters. As a matter of course, they refer all bankruptcy matters to the specialized bankruptcy courts. Understanding the system of bankruptcy courts is essential to a clear picture of possible the avenues that your bankruptcy case may take.

Jurisdiction

Unlike other federal courts (such as the district courts), bankruptcy courts are created at the legislative level. This means the courts were established by Congress under its legislative authority to create courts under Article I, Section 8 of the Constitution.

Under the federal statute 28 U.S.C. 1334, bankruptcy courts have exclusive jurisdiction over bankruptcy cases. This means a bankruptcy case cannot be filed in state court. That's because a uniform bankruptcy system requires cases to be filed in a uniform federal system instead of in different state courts, which may have different rules and regulations.

Some matters in a bankruptcy case are so central to the bankruptcy process, they are designated as core matters. Core matters can include interpreting the bankruptcy code itself, how claims are handled, what debts are dischargedChapter 13 repayment plans and how Chapter 11 debtors are reorganized. 

A core matter is decided by the bankruptcy judge. Appeals can be filed in the district or appellate court with special permission. With non-core matters, the parties can decide if the bankruptcy judge has the final say (at least at the trial court level), or whether the district judge has to put his stamp of approval (or disapproval) on the decision. 

A bankruptcy judge may also be called on to decide non-bankruptcy matters. These are issues that could be decided by the district court or even state courts, but arise in the context of a bankruptcy case. For instance, a bankruptcy judge may be called on to interpret the terms of a contract so the parties can determine the amount of a claim.

Bankruptcy Judges

Bankruptcy judges are appointed for 14-year terms by the United States Court of Appeals for the particular federal circuit in which the bankruptcy court resides. Thus, unlike federal district court and appellate judges, who are appointed for life, the term of a bankruptcy judge must be renewed every 14 years by the appellate court. It is quite possible for an appellate court not to renew a bankruptcy judge's term if it is unhappy with his or her performance. Likewise, the bankruptcy judge can choose to decline a 14 year appointment.

 

System of Appeals

Although all initial bankruptcy matters are handled by a bankruptcy court, appeals of orders, decisions, and judgments are usually handled by district courts and, in some cases, by appellate courts.

Some circuits have what is known as a bankruptcy appellate panel (BAP). BAPs have been convened in the FIrst, Sixth, Eighth, Ninth and Tenth Circuits. The appellate panel consists of bankruptcy judges from the same circuit who hear bankruptcy appeals. Even in circuits which have a bankruptcy appellate panel, an appellant may choose to have his appeal heard by the local federal district court.

The next level of appeal is the United States Court of Appeals for the particular circuit in which the bankruptcy court sits. For example, an appeal from the bankruptcy court in San Francisco will eventually move up to the Ninth Circuit Court of Appeals.

The final level of appellate review is the Supreme Court of the United States.

Federal Rules of Bankruptcy Procedure

The proceedings in bankruptcy courts are governed by the Federal Rules of Bankruptcy Procedure. As the name suggests, these rules govern the procedural aspects of bankruptcy proceedings and trials, such as the time within which you must file your bankruptcy schedules. In large part, the bankruptcy rules of procedure mirror and incorporate the Federal Rules of Civil Procedure, which govern litigation in other federal courts. Thus, litigation in bankruptcy courts is very similar to litigation in federal district courts.

Finding Bankruptcy Courts

If you are considering filing for bankruptcy, it is important to identify and locate the appropriate bankruptcy court. According to federal statute, you must file your bankruptcy case in the federal district in which you had your primary residence, had a principal place of business, or principal assets in the United States within the 180 days prior to filing.

For example, if you have a summer home in Texas, but live nine months of the year in California, your domicile is likely California — not Texas. Once you have determined your domicile city, go to the U.S. Courts website. Click your domicile state on the colored map, then, click "Advanced Search." Click "Search by Circuit," choose "Bankruptcy Court" in the drop down menu. Choose your federal circuit according to the colored map and click "Locate." Find the closest bankruptcy court. to you geographically.

Keep in mind that many states have multiple bankruptcy courts. Contact one of the courts to ensure you choose the proper court.

As always, a qualified bankruptcy attorney is your best resource when you are contemplating bankruptcy. 

The Bottom Line

If you're swimming in debt and can't seem to tread water, bankruptcy may be the only way to find some relief. But it can be a confusing process. Knowing how the system works, including which courts oversee the process and how they work, can help alleviate some of the stress. Keep in mind though, that a bankruptcy will stay on your credit record for at least seven years, so it should be a last resort.