Bankruptcy Court Explained 2025: Costs, Procedures & Key Cases

Julia Kagan is a seasoned financial and consumer journalist, formerly a senior editor in personal finance at Investopedia.

What Is a Bankruptcy Court in 2024?

Bankruptcy courts are specialized federal courts dedicated to resolving cases where individuals or businesses cannot meet their financial obligations. Established under the authority granted by the U.S. Constitution in 1787, these courts apply uniform federal bankruptcy laws that have evolved over time to meet modern financial challenges.

Key Insights

• Bankruptcy courts operate within the federal judiciary and follow federal bankruptcy statutes.
• There are multiple bankruptcy types that debtors may qualify for, each addressing different financial situations.
• The United States has 94 bankruptcy courts, with judges appointed for 14-year terms.
• Parties dissatisfied with bankruptcy rulings have the right to appeal decisions.

How Does Bankruptcy Court Function?

Unlike most legal matters heard in state courts, bankruptcy cases are exclusively handled in federal courts due to the federal nature of bankruptcy law. However, state laws may influence certain aspects, such as asset exemptions that protect some debtor property from liquidation.

Each of the 94 federal judicial districts in the U.S. hosts a bankruptcy court. Cases must be filed in the district where the debtor primarily resides, operates their business, or holds major assets for a specified time period.

Bankruptcy judges, appointed by the U.S. Court of Appeals, serve 14-year terms. Proceedings are generally public unless sealed by court order and can be accessed via the Public Access to Court Electronic Records (PACER) system or at the court clerk’s office.

Bankruptcy Court Procedures

Once a bankruptcy petition is filed, the court assesses the debtor’s finances to determine how assets will be allocated to repay creditors. The court’s ruling often results in discharging some debts, freeing the debtor from further liability on those obligations.

However, certain debts such as taxes, child support, alimony, and personal injury liabilities cannot be discharged. Additionally, secured debts tied to collateral, like car loans, remain enforceable, allowing creditors to reclaim property if payments are not made.

Did You Know?

Modern bankruptcy courts frequently use video and audio conferencing to accommodate creditors and parties from various locations, streamlining the process.

Common Bankruptcy Types in 2024

Bankruptcy cases are categorized by chapters under Title 11 of the U.S. Code, each serving distinct purposes:

• Chapter 7: Known as liquidation bankruptcy, it allows individuals or businesses to discharge most debts by selling non-exempt assets. Creditors typically receive partial repayment. This is the most prevalent bankruptcy type for individuals.
• Chapter 11: Primarily used by businesses to reorganize debts and continue operations while repaying creditors. Some individuals with substantial debt may also file under this chapter.
• Chapter 12: Tailored for family farmers and fishermen with steady income to restructure debts.
• Chapter 13: Enables individuals to create a repayment plan lasting three to five years, often allowing them to keep more assets while repaying creditors.
• Chapter 15: Addresses cross-border insolvency cases involving assets or debts in multiple countries to coordinate fair treatment of all creditors.

Costs and Considerations: Avoiding Bankruptcy Court

Bankruptcy is often considered a last resort due to its financial and personal implications. Debtors face various fees including attorney costs, court filing fees, and administrative expenses.

Filing for bankruptcy also makes financial information public, potentially impacting personal or corporate reputations. Moreover, bankruptcy can significantly lower credit scores for years, affecting future borrowing ability.

In liquidation cases, debtors relinquish control over assets to trustees who manage sales to repay creditors.

Appealing Bankruptcy Court Decisions

Debtors or creditors who disagree with a bankruptcy ruling can file an appeal within 10 days. Appeals are usually handled by specialized bankruptcy appellate courts within judicial circuits.

Notable 2024 Bankruptcy Case: FTX Trading Ltd.

In November 2022, cryptocurrency exchange FTX Trading Ltd. and over 100 affiliates filed for Chapter 11 bankruptcy amid a massive financial shortfall allegedly caused by misappropriation of depositor funds. Founder Sam Bankman-Fried resigned and later faced criminal fraud charges.

The bankruptcy court continues to oversee asset distribution and reorganization plans, which have encountered creditor objections and ongoing litigation as of early 2024.

Frequently Asked Questions

What Happens When Bankruptcy Is Declared?

The court evaluates your financial status and either orders asset liquidation or approves a repayment plan depending on the bankruptcy type.

Does Bankruptcy Court Result in Jail?

No. Bankruptcy proceedings focus on debt resolution, not criminal penalties. Criminal matters are handled separately if suspected.

Will Bankruptcy Erase All Debts?

Bankruptcy can discharge many debts, but obligations like alimony, child support, and taxes usually remain.

Is Filing Bankruptcy Better Than Doing Nothing?

Each situation is unique. Bankruptcy can halt creditor harassment and eliminate some debts but impacts credit and reputation. Courts require credit counseling before filing.

Conclusion

Bankruptcy courts play a vital role in helping individuals and businesses manage overwhelming debt while ensuring creditors receive fair treatment. The federal system provides consistent procedures nationwide, guiding debtors through complex financial challenges in 2024 and beyond.

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