Understanding the Role of Bankruptcy Trustees

A bankruptcy trustee is assigned to every chapter 7 and chapter 13 bankruptcy case after it is filed. The United States Trustee at the Justice Department is tasked with appointing and supervising bankruptcy trustees. By and large, trustees are lawyers or professionals with extensive experience in bankruptcy. The duties of a bankruptcy trustee vary depending on whether the case is a Chapter 7 or a Chapter 13. This article will focus on the duties of Chapter 7 trustees.

Whether the case is a Chapter 7 or a Chapter 13, the trustee is required to review the debtor’s petition and accompanying documents, conduct the meeting of creditors, administer the bankruptcy estate, and ensure that the debtor is not committing bankruptcy fraud.

A Chapter 7 bankruptcy is known as liquidation bankruptcy because the debtor’s non-exempt assets (if any exist) are liquidated to compensate the creditors. The Chapter 7 trustee’s specific job is to administer the estate and distribute any available funds to the creditors that file claims. The Chapter 7 trustee generally gets paid based on the amount of funds that she distributes to creditors. However, if all of the debtor’s assets are exempt, the trustee is paid a small fee taken from the court filing fee.

When a debtor files bankruptcy, she has to complete a petition and accompanying schedules. (Fortunately, these documents are typically completed with the assistance of debtor’s attorney.) The documents are very detailed and represent a complete explanation of the debtor’s financial affairs. In addition to reviewing these documents, the trustee also reviews pay stubs, tax returns, and any other relevant information that she requests. It is the trustee’s responsibility to review these documents and verify the accuracy of the information.

One of the ways that the trustee verifies financial information is through the Meeting of Creditors. About one month after the filing of the bankruptcy petition, the debtor must appear in court to be questioned under oath. The bankruptcy trustee’s task is to conduct the hearing and ask questions about the information contained in the bankruptcy documents. This meeting (commonly known as a “341 meeting” because of the section of the code that is comes from) also acts as an opportunity for creditors to show up and ask the debtor questions. It is somewhat rare for creditors to show up unless there is some reason to contest the facts in the petition and schedules.

One of the most substantial responsibilities of the Chapter 7 trustee is to sell the debtor’s non-exempt assets. A Chapter 7 debtor is allowed to keep assets up to a certain value as determined by the laws of each individual state. These assets are considered exempt and are protected from the bankruptcy. If the debtor has assets that are not exempt, the trustee will determine the non-exempt value and liquidate them in such a way that gives the maximum return to the creditors that filed a claim. If there are no assets to distribute, the trustee will file a notice of no distribution and the case will soon conclude.

The trustee also has a few other duties including avoiding preferential transfers or certain types of security interests. If a debtor gives assets to a family member just before filing bankruptcy, the trustee may be able to avoid this transfer in order to get the money to give to creditors. On the flip side, the trustee can avoid a lien or security interest if a creditor did not create it properly.

Understanding the role of the bankruptcy trustee is vital for a debtor who wants to swiftly and smoothly complete the bankruptcy process. This serves as yet another reason that it is essential to seek the counsel of an experienced bankruptcy attorney.