What is bankruptcy court?

Business owners sometimes file for bankruptcy to facilitate financial restructuring and reorganise their debts without having to lose their company. To simplify, you could end up in bankruptcy court if you can't afford to pay your debts. Let’s dive into the bankruptcy court meaning to learn more.

Specialised federal courtrooms that settle all types of personal and corporate bankruptcy cases are known as bankruptcy courts. In the US, the federal court system runs a US bankruptcy court operated by the Federal government.

The bankruptcy court did not come into existence at the same time as the federal court, which the US Constitution established in 1781. Congress established it as part of the Bankruptcy Reform Act in 1978. The US Bankruptcy Code has undergone several amendments since then.

How does a bankruptcy court work?

Bankruptcy must be filed in a federal court, unlike most criminal, civil and family cases that can be heard in a state court. Federal law governs bankruptcy. In order to start a bankruptcy proceeding, one must work with the federal court system.

In the US, bankruptcy court judges are appointed for a tenure of 14 years by the Court of Appeals. There are 94 federal judicial districts across the country and each has its own bankruptcy court. A bankruptcy case must be filed or heard in the judicial district where the company or subject is located. While proceedings are conducted in the home location, in order to maintain consistency from state to state, the Federal Rules of Bankruptcy Procedure govern the entire bankruptcy process.

Proceedings of a bankruptcy court are generally open to the public, however, in certain cases, the judge may keep the case under seal, and one can only access it at a bankruptcy clerk’s office or through the Public Access to Court Electronic Records (PACER).

Bankruptcy court operation process

Bankruptcy occurs when a person or business fails to repay debts. The debtor can file a petition. The bankruptcy court then gauges the debtor’s situation and devises a plan to repay a portion of outstanding debt with the debtor’s assets.

A bankruptcy judge oversees the decision and decides whether or not the debtor should be discharged of their debts. The court discharging debts means that the debtor will no longer have any responsibility or personal liability for the debts associated with the filing. 

However, some debts like tax claims, alimony payments, child support and for personal injury are ineligible for discharge. Another exception is given on secured property – individuals cannot be discharged from any debt on such property and the creditor can enforce a lien on the debtor’s property.

Business owners or individuals can appeal a bankruptcy court decision within 10 days of the bankruptcy court’s decision. An appeal can be the result of a creditor’s claim not being honoured or being disputed by the bankrupt business or individual. An appeal court generally handles bankruptcy appeals. Several judicial circuits have their own bankruptcy-specific appellate courts to address such disputes. 

Bankruptcy court cases examples

An individual who has racked up credit card debt too high for them to pay back can file for chapter 7 bankruptcy. Assessing the living circumstances and conditions of the individual, the bankruptcy court may provide a ruling to wipe away their debts.

Bankruptcy courts facilitate the reorganisation or restructuring under chapter 11 bankruptcy in the case of a company or business unit. 

Let’s look at an example. 

On 1 September 2021, Judge Robert Drain of the US Bankruptcy Court in White Plains, New York, approved a $4.5bn settlement of the chapter 11 bankruptcy of Purdue Pharma LP, manufacturer of OxyContin. The settlement directive led to the dissolution of Purdue Pharma and the creation of a new public benefit company charged with funding opioid addiction treatment and prevention. The former owner will have to pay $4.5bn and federal settlement fees over a nine-year period from legal claims related to the opioid epidemic. The Purdue team has to release 30 million documents related to the case.