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Jurisdiction and Procedure

Federal statute requires that federal district courts maintain jurisdiction over bankruptcy matters. District court judges do not preside over bankruptcy cases, however. Instead, units within the district courts manage bankruptcy cases. Federal appellate court judges appoint bankruptcy judges to these units, and these judges, with their specialized knowledge of the bankruptcy laws and rules, preside over bankruptcy cases. Thus, the federal district courts technically have jurisdiction over bankruptcy filings but in practice refer the matters to the bankruptcy judges.

Most bankruptcy cases require that the bankruptcy court appoint a trustee. The bankruptcy trustee’s job is to impartially administer the bankruptcy estate, which includes the assets of the debtor. Once a debtor files for bankruptcy protection, the debtor’s assets—savings, houses, cars, jewelry, stocks, and bonds are examples of assets—become the bankruptcy estate, and the bankruptcy estate becomes a distinct legal entity separate from the debtor. The trustee represents the bankruptcy estate and at the direction of the bankruptcy judge may sell assets, or otherwise oversees if, when, and how the assets will be distributed to pay the debts.

In 1986, Congress permanently established a central office to oversee the work of bankruptcy trustees throughout the country. The office of the U.S. trustee has trustees, appointed by the U.S. attorney general, in each region of the United States. These appointed U.S. trustees, in turn, appoint and supervise additional trustees, ensuring that trustees do their jobs competently and honestly. U.S. trustees also have the responsibility to monitor and report fraud by debtors and abuse by creditors.

One important aspect of the bankruptcy laws is the “automatic stay.” As soon as a debtor files the proper legal documents requesting bankruptcy protection, the automatic stay takes effect. This means that all efforts by creditors to collect from the debtor are, by law, frozen, and a creditor who ignores the automatic stay faces severe penalties. The automatic stay gives the debtor, the trustee, and the court time to determine the proper course of action in getting the debts repaid. A party who has a claim against the bankruptcy estate and shows good cause for not being included in the requirements of the automatic stay may ask the bankruptcy judge for “relief from the automatic stay.”

When the debtor complies with the bankruptcy liquidation or reorganization plan and the plan is completed, the bankruptcy judge may discharge any remaining debt and terminate the bankruptcy case. This action also terminates the automatic stay and ends the bankruptcy court’s involvement with the debtor. Typically, the debtor is left without any debts since the bankruptcy plan has repaid them or the bankruptcy court has discharged them. Also typically, the debtor is left with a poor credit rating and has difficulty borrowing money, obtaining credit cards, and financing things like homes, cars, and business ventures. Credit bureaus can report a bankruptcy for ten years after the date of filing.

Sometimes creditors offer debtors the opportunity to “reaffirm” a debt—in other words, to keep the debt and agree to pay it off even if it is eligible for liquidation. Debtors often do this when they feel it would be to their advantage to maintain a good relationship with certain creditors. Reaffirming a debt does not improve the debtor’s credit rating, and leaves the debtor with an undischargable debt, thus defeating the purpose of bankruptcy as a form of financial relief. Many lending institutions do allow debtors to obtain credit in the form of a”secured” credit card, in which the debtor deposits money into a bank account as collateral against the use of the card. This can be useful for people who wish to gradually rebuild their credit ratings.

Inside Jurisdiction and Procedure