After you file your petition (the paperwork that starts the bankruptcy process), the court will appoint someone called a “trustee” to oversee your case. The trustee’s responsibilities include checking the accuracy of your petition and schedules, verifying your identity, and, if money is available to pay creditors, dispersing payments. You’ll meet the trustee (or an assistant) at the 341 meeting of creditors—the one hearing that all bankruptcy filers must attend. In this article, you’ll learn more details about the role of the bankruptcy trustee.
The 341 Meeting of Creditors
Before the date set for the 341 meeting of creditors, you’ll provide “521 documents,” such as bank statements, paycheck stubs, and tax returns, to the trustee. The trustee will compare the data to the information in the bankruptcy petition and schedules and ask any questions that might arise at the meeting, but could contact you beforehand.
The meeting itself will likely occur in a conference room at the courthouse with up to ten other bankruptcy filers present. The trustee will take roll and give an opening speech explaining the process and admonishing filers to answer questions truthfully before calling up each filer to the front. Here’s what the trustee will do when it’s your turn:
- review your identification
- place you under oath
- ask standard questions all filers must answer, and
- ask follow-up questions specific to your case.
Once finished, the trustee will allow any creditors in attendance to question you, but it’s unlikely that any will because they rarely come to the meeting. If you’ve provided proper identification and all of the required documentation—and the trustee is satisfied with your answers—the trustee will conclude the meeting. If not, the trustee will continue it to another day.
(Find out what to expect at the hearing in How Should I Prepare for the 341 Meeting of Creditors in Bankruptcy?)
Specific Duties of a Chapter 7 Bankruptcy Trustee
The primary job of the trustee in a Chapter 7 bankruptcy is to sell your property and use the money to repay your creditors. However, that doesn’t mean that you’ll lose all of your stuff. You’ll be allowed to exempt (keep) a certain amount of property, such as household goods and furnishings, clothing, and a modest car. But, if you own “nonexempt” property that you’re not entitled to keep, it’s the trustee’s job to liquidate (sell) it and distribute the sales proceeds to the creditors. (Most people can exempt all of their property.)
The trustee does more than sell the property listed in your paperwork, however. The trustee will review your prior transactions, too. If it appears that you improperly transferred property to someone else—for instance, say you sold your car to your neighbor for $1—the trustee has the power to unwind (undo) the transaction, get the vehicle back from the neighbor, and sell it for the benefit of your creditors. Here are a few other things that you might not realize that the trustee can take:
- proceeds from a lawsuit (the trustee can take your place in the case)
- corporate stock or interest in a limited liability company
- lottery winnings or an inheritance, and
- accounts receivable from a business (amounts owed by a customer for completed work).
It’s important to understand that the trustee’s job is to find money to pay creditors, not to protect your interests. As an incentive for thoroughness, the trustee gets a percentage of any funds distributed to unsecured creditors (those whose debts aren’t guaranteed by collateral, such as a car or house) in addition to a nominal fee to review your petition. In other words, the more property the trustee liquidates, the larger the payday.
(For more details about how debt gets paid in bankruptcy, read Understanding the Payment Priority of Debt in Bankruptcy.)
Specific Duties of a Chapter 13 Bankruptcy Trustee
The trustee distributes funds to creditors in a Chapter 13 case, too, but the funds come from another source. Specifically, the trustee won’t sell your nonexempt assets. Instead, you’ll pay the value of your nonexempt property over the course of a three- to five-year repayment plan (in addition to your disposable income). For example, if you have $100,000 in equity in your home, but you’re only allowed to exempt $50,000, you’ll have to pay $50,000 in your repayment plan, or, $833.00 each month (plus any other required amount). The trustee will process your plan payment and issue checks to creditors on a monthly basis.
It’s your (and your attorney’s) responsibility to propose (come up with) the repayment plan. The trustee will review it for “feasibility” by checking that:
- you’re paying all of your disposable income into the plan
- your total plan payment equals the value of your nonexempt property (at a minimum)
- creditors will receive the proper payment amount, and
- you have enough income to complete the plan.
If your plan falls short and fails to meet all requirements, the trustee will object to confirmation (approval) by the court.
Factors beyond the scope of this article go into creating a confirmable repayment plan. If you’re contemplating filing for Chapter 13 bankruptcy, you should consult with an attorney.
Other Trustee Responsibilities
Both types of bankruptcy trustees have other responsibilities, as well. For instance, when the case is an “asset” case (money is available for creditors), the trustee will review the payment claims submitted by the creditors. If there’s reason to believe that the debt shouldn’t be paid—for instance, the debt is too old and violates the statute of limitations (the law that requires the creditor to sue within a number of years)—the trustee will file an objection to the claim.
Also, the trustee might object to a filer’s discharge (the order that wipes out qualified debt) if the trustee discovers the filer was engaged in fraudulent activity or wasn’t honest in the bankruptcy paperwork.
Questions for Your Attorney
- What questions will the trustee ask me at the 341 meeting of creditors?
- How do I prove the value of a nonexempt asset?
- Can the trustee object to my property exemption?