Bankruptcy affects more people than you probably realize. If you haven't been personally affected, it's almost guaranteed to have affected your family, neighbors, or co-workers. According to the United States Court, there were 659,881 personal bankruptcy filings during the 12-month period ending June 30, 2020.
When you are affected by a bankruptcy case, you may be confused and frustrated by the process. Learn more about how the bankruptcy court system works.
What Is Bankruptcy?
Bankruptcy is a procedure designed to provide financial relief to people or organizations experiencing the overwhelming burden of debt, ultimately ceasing all collection activity from creditors. This means once someone declares bankruptcy, in most cases a creditor can no longer take any action against the debtor for the outstanding debt.
Individuals have two options for filing bankruptcy. The first is Chapter 7, which allows you to have all your debts discharged after your 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 median income for a family in your state.
If you don't pass this test, then you may have to file for Chapter 13. With this option, you repay a portion of your debt in a three- to five-year payment plan. These payments are made directly to the court and distributed to creditors.
A bankruptcy will stay on your credit history for at least seven years, so it should be a last resort when it comes to resolving your debt.
Chapter 7 bankruptcy stays on your credit report for 10 years. Chapter 13 remains on your report for seven.
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 bankruptcy courts are all federal, whose system is divided into levels:
- Trial courts
- Circuit courts
- The 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. Understanding the bankruptcy court system is essential to have a clear picture of the avenues that your bankruptcy case may take.
Bankruptcy Court Jurisdiction
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 a state court. That's because a uniform bankruptcy system requires cases to be filed in a uniform federal system instead of state courts, which may have different rules and regulations.
Some matters in a bankruptcy case are so central to the bankruptcy process that they are designated as core matters. Core matters can include interpreting the bankruptcy code itself, how claims are handled, what debts are discharged, and Chapter 13 repayment plans.
A core matter is decided by a bankruptcy judge. Appeals can be filed in the district or circuit court with special permission. With non-core matters, the parties can decide whether 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 are appointed for 14-year terms by the United States Court of Appeals for the particular federal circuit in which the bankruptcy court resides. 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's possible for an appellate court to not renew a bankruptcy judge's term if it's unhappy with their 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 circuit 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 that have a bankruptcy appellate panel, an appellant may choose to have his appeal heard by the local federal district court.
The next level of appeals 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.
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, 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. Once you've determined your domicile city, go to the U.S. Courts website to find the closest court. As always, a qualified bankruptcy attorney is your best resource when you are contemplating bankruptcy.