When you get involved with bankruptcy proceedings, you hear a lot about the “trustee”. The bankruptcy trustee plays a critical role in bankruptcy, so it is important for you to understand who the bankruptcy trustee is and the bankruptcy trustee’s role in a bankruptcy case.
WHO IS THE BANKRUPTCY TRUSTEE?
One way to understand the bankruptcy trustee is to start by looking at who the trustee is not.
- The Bankruptcy Trustee is Not the Bankruptcy Judge
The bankruptcy judge is a judicial officer of the Unites States court system. The bankruptcy judge is empowered with decision-making authority over legal issues related to bankruptcy cases.
However, in most bankruptcy cases, the debtor has little or no direct contact with the bankruptcy judge. The only bankruptcy official that the debtor is likely to have contact with is the bankruptcy trustee. As a result, some debtors may mistake the bankruptcy trustee for the bankruptcy judge.
- The Bankruptcy Trustee is Not the United States Trustee
Which trustee are we talking about? There are actually two trustees involved in bankruptcy cases: the U. S. Trustee and the bankruptcy case trustee (sometimes called the “panel trustee”).
The Office of the United State Trustee is a division of the U.S. Department of Justice. The U.S. Trustee is charged with several tasks, including overall supervision of the bankruptcy system, appointment of case trustees, and review of individual bankruptcy cases. The U.S. Trustee will impact a bankruptcy case, but it is not what most people think of as the “bankruptcy trustee.”
When most people use the term “bankruptcy trustee”, they are usually referring to the “case trustee” or “panel trustee”, not the U.S. Trustee. The bankruptcy trustee is appointed by the U.S. Trustee to serve as the administrator for a particular bankruptcy case. Often, the U.S. Trustee appoints a panel of trustees to serve a particular geographic area (which leads to the moniker of “panel trustee”).
- The Bankruptcy Trustee Administers the Assets of the Bankruptcy Estate
When you file for bankruptcy protection, a bankruptcy trustee is usually appointed. The bankruptcy trustee is often an attorney with experience in bankruptcy law.
Appointment of a trustee is automatic is Chapter 7, Chapter 12 and Chapter 13 cases. In Chapter 11, the debtor usually fulfills the role of the trustee by acting as a “debtor-in-possession”, except in rare cases where a case trustee is appointed by the Court.
WHAT DOES THE TRUSTEE DO?
Once appointed, the bankruptcy trustee becomes responsible for managing and administering the assets of the bankruptcy estate. The bankruptcy trustee legally controls your assets during the bankruptcy proceeding. The trustee generally does not take physical control of your assets; your assets usually remain in your possession, unless the trustee administers some of those assets on behalf of the estate and your creditors. However, during the bankruptcy proceeding, you are not allowed to dispose of any estate assets unless you first obtain permission from the bankruptcy trustee or the bankruptcy judge.
The trustee’s exact responsibilities depend on the type of bankruptcy case that was filed. However, the bankruptcy trustee is generally responsible for investigating the assets of the estate, including conducting the Meeting of Creditors hearing, for administering the property of the estate, and, when appropriate, for reviewing the creditor’s claims for payment and making distribution payments to creditors. To facilitate these duties, the bankruptcy trustee has certain powers to deal with assets for the benefit of the estate.
- Investigation of Assets of the Estate
As discussed in our article about the bankruptcy estate, not all of your assets become part of the bankruptcy estate. The trustee has no power over the assets that are excluded from the estate. In addition, you may claim protections called “exemptions” for your assets that become part of the bankruptcy estate. Although exempt assets become part of the estate, the exemptions shield some of your assets from administration by the trustee; the exempt assets are eventually returned to your control. If the trustee or your creditors believe your claimed exemptions are not valid, they can object to your exemptions.
- Review of Bankruptcy Petition and Financial Documents
The bankruptcy trustee reviews the bankruptcy petition and related documents that you file with the bankruptcy court. The bankruptcy trustee may also review your financial records, including your tax returns, bank statements, and income records. This review gives the trustee insight into your assets and your finances and also helps the trustee detect any inaccuracies or fraud.
- Bankruptcy Hearing
As part of the investigation, the bankruptcy trustee conducts the “Meeting of Creditors” Hearing. During the hearing, the bankruptcy trustee places you under oath and asks you questions about your assets, your debts, your finances, and the information contained in your bankruptcy petition and related paperwork.
- Collection of Estate Property
As discussed earlier, the bankruptcy trustee legally controls all of the assets of the estate during the bankruptcy proceeding. The trustee is responsible for ensuring that the assets are protected from harm. Under normal circumstances, you keep your assets in your possession, unless the trustee administers an asset, in which case you must turn the asset over to the trustee. In unusual circumstances, the bankruptcy trustee may take possession or control of an asset, if it is necessary to protect or preserve an asset.
The trustee may also collect property of the estate that is in the possession of third parties, such as your friends and family or financial institutions.
The trustee is entitled to pursue your rights and claims. For example, the trustee may pursue your right to file a lawsuit for money damages and collect those damages on behalf of the estate and the creditors.
The bankruptcy trustee also has certain powers to recover money or property. These powers are generally called the trustee’s “avoidance powers” because the trustee is authorized to avoid certain transfers you made before filing the bankruptcy case. Such transfers include:
- Post-Petition Transfers: when you made unauthorized transfers of estate assets after the bankruptcy filing.
- Invalid Perfection: when a security interest and other transfers of property were not properly perfected or completed prior to the bankruptcy filing.
- “Fraudulent transfers”: when you have transferred money or property to hide it from your creditors or the trustee.
- “Preference payments”: when you paid large amounts of money or property to particular creditors shortly before the bankruptcy proceeding commenced.
Using these powers allows the bankruptcy trustee to gather additional assets that should have been available for creditors and make a fair and equitable distribution to your creditors.
- Administration of Estate Property
Another major trustee duty is to “administer” the property of the bankruptcy estate. What happens when the bankruptcy trustee administers your assets depends on what type of bankruptcy you file. The Chapter 7 bankruptcy trustee’s role is very different from the role of a bankruptcy trustee in Chapter 11, 12 or 13.
- Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, the bankruptcy trustee’s administration of your assets involves collecting and liquidating your non-exempt assets for the maximum benefit of your unsecured creditors. If the trustee locates non-exempt assets, the trustee sells those assets at the highest price. The highest price might be obtained by selling the assets at a public or private auction, or by “selling” the assets back to you (when you make a cash offer to the trustee to retain the non-exempt assets).
When your assets are partially exempt, the trustee can sell the assets and pay you the exempt portion of the sale proceeds. For example, if you have an asset that could be sold for $10,000, but your exemption protection is only for $3,000, then the trustee could sell that asset, pay you $3,000, and use retain the remaining balance of $7,000.
Also, when your assets are jointly-owned, the trustee can liquidate the entire asset to obtain your share of the asset. For example, if you share equal ownership of an asset with a family member that is worth $10,000, the trustee could sell the entire asset, give half of the sale proceeds to your family member, and retain your half of the sale proceeds.
If one of your assets is subject to a valid lien or security interest, the trustee takes control of that asset with the lien. For example, if your car is valued at $10,000, but your car is subject to a $10,000 title loan, the trustee cannot liquidate your car without paying of the balance of the loan and therefore usually will not do so. However, if your car is subject to a $2,000 loan, then the trustee could sell the car, pay off the loan, and retain the remaining sale proceeds. It is also worth noting that some liens are not valid and may be avoided or disregarded by the bankruptcy trustee.
As a practical matter, most Chapter 7 bankruptcy cases end up being declared “no asset” cases. That means all of the assets are protected by exemptions or are too cumbersome to liquidate. The result is there are no non-exempt assets for the trustee to liquidate, and you get to keep all of your assets. If you retain an experienced bankruptcy attorney, your attorney will be able to advise you about whether your assets are exempt or whether any of your assets could be liquidated in Chapter 7 bankruptcy.
The Chapter 7 bankruptcy trustee is paid a small, flat fee for each case they handle. However, the trustee also receives a commission based on a percentage of the value of the assets liquidated in a case. This gives the Chapter 7 bankruptcy trustee incentive to liquidate as many assets as legally allowed.
- Chapter 12 Bankruptcy & Chapter 13 Bankruptcy
In Chapter 12 and Chapter 13 bankruptcies, the bankruptcy trustee’s administration involves reviewing your proposed bankruptcy plan for compliance with the bankruptcy laws. If the trustee detects problems with the plan, the trustee may formally object to the plan.
If the plan is confirmed by the bankruptcy judge, the bankruptcy trustee becomes responsible for collecting the payments required by the plan from you and distributing those funds to your creditors pursuant to the confirmed plan.
The Chapter 12 and Chapter 13 bankruptcy trustee collects a commission that is based on the percentage of the funds you pay through the plan.
- Chapter 11 Bankruptcy
In Chapter 11 bankruptcy, the role of the bankruptcy trustee is somewhat like the role of the trustee in Chapter 12 and Chapter 13 bankruptcy, in that the trustee is charged with administration of the bankruptcy plan. However, Chapter 11 is radically different because, in most cases, the debtor assumes the role of the bankruptcy trustee as a “debtor in possession”.
In other words, if you file a Chapter 11 bankruptcy, no bankruptcy trustee is automatically appointed and you retain possession and control of your assets. You are given the powers and responsibilities of a bankruptcy trustee, including investigation of the estate, review and objection to claims, and filing certain reports with the bankruptcy court. Your performance as debtor in possession is supervised and monitored by the United States Trustee.
You remain in the role of “debtor in possession”, unless the bankruptcy judge appoints a case trustee to your case. Case trustees are appointed in only a small number of Chapter 11 cases.
- Review of Claims and Distributions to Creditors
Once the bankruptcy trustee has reduced your non-exempt assets to cash, the trustee is responsible for reviewing the creditors’ claims and making distributions to the creditors.
Your creditors are responsible for filing claims for payment. If a creditor fails to file a claim, the bankruptcy trustee is not obligated to make payments to that creditor.
If the bankruptcy trustee believes that a creditor’s claim is invalid, the trustee may object to the claim and the creditor would bear the burden of proving the claim to the bankruptcy court judge.
The trustee makes distribution payments to creditors based on order of payments, called priorities, established by bankruptcy law. Once the trustee has completed distribution to the creditors, the trustee provides an accounting of the estate to the bankruptcy court and the U.S. Trustee to review and approve. Once the distribution and account is complete, the bankruptcy case is usually set to close.
This information is intended to give you a general overview of the role of the Trustee in the bankruptcy process. However, this information is not exhaustive. If you have specific questions about the bankruptcy trustee and the role the trustee may play in your bankruptcy proceeding, please feel free to contact us.