Why Is Bankruptcy Handled by Federal Courts?

Like many of the laws that currently govern New Yorkers and other Americans throughout the nation, bankruptcy laws are originally based on ideas from British governance. According to the Federal Judicial Center, the first bankruptcy laws and procedures established in this country were set in 1800 and allowed business people to be held accountable for their debts at the request of their creditors. It was not until reforms in 1841 that debtors could file for bankruptcy support themselves.

Debtors and creditors could file for bankruptcy in federal courts due to the United States Congress’ power to establish consistent national bankruptcy laws per its mandate in Article I of the Constitution. Federal powers to hear bankruptcy and related matters were expanded in 1867. This expansion permitted federal courts to adjudicate not only bankruptcy matters but also those legal disputes that arose tangentially to the bankruptcy cases.

Over the next 100 years, the United States Congress increased and reduced the federal courts’ power to hear matters related to active bankruptcy proceedings. However, in 1978, the Bankruptcy Act codified the federal courts’ power to hear and decide matters that arose under bankruptcy cases. Only four years later, a case reached the United States Supreme Court that determined that the Bankruptcy Act reached too far. Federal bankruptcy courts could no longer decide matters based on state laws that were not sufficiently related to the underlying bankruptcy cases.

As it stands, federal courts still hear individual and business bankruptcy matters but are limited in their abilities to adjudicate certain related matters based on state law. Readers of this blog may have more questions about how their bankruptcy and related matters will be treated in the state courts of New York and the federal courts of the district. To have specific legal questions addressed, please consider seeking individual legal advice about any outstanding debt or bankruptcy problems.