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Even if you have a bankruptcy lawyer helping you through your bankruptcy, another person you’ll meet is the bankruptcy trustee. When you file for bankruptcy, this trustee is named to move your case through the bankruptcy process until it’s complete. In most cases, expect more contact with the bankruptcy trustee than with the judge.
Be familiar with the role and duties of the bankruptcy trustee and understand the progress of your case.
Primary Trustee Duties
One of the main duties of the trustee is to administer the bankruptcy estate. The bankruptcy estate is the property and related property rights of someone who files a bankruptcy petition. A filer keeps exempt property, which is protected from creditor claims. The trustee can decide to abandon other assets, if they aren’t of value to the estate. For remaining assets, the trustee must:
- Collect estate property from the debtor or a third party holding it
- Convert the property to cash, usually by selling it
- Be accountable for estate property
The trustee also handles intangible property and voids or cancels certain transactions involving estate property. Estate assets include a filer’s intangible rights that may have value. One example is a debtor’s right to file lawsuits that may end with an award of damages.
Sometimes there are transactions involving a filer’s property that aren’t allowed under bankruptcy law. The trustee has power to cancel some transactions or transfers. For example, you can’t favor one creditor over others, or transfer property to try to hide it from your creditors. These transactions may be “preferences,” “avoidable transfers” or “fraudulent transfers” that the trustee can reverse.
The idea is for the trustee to gather and account for all assets that should be available in settling a debtor’s financial affairs, be fair in paying claims, and see the case through to the discharge of remaining debts and the debtor’s financial fresh start.
The Trustee, Claims and Creditors
Meeting of Creditors
The trustee holds the meeting of creditors early in the case, during which the trustee and creditors can ask the debtor questions on his or her finances. This meeting is part of the process for investigating the bankruptcy estate and gathering assets.
Selling Estate Property
Selling estate property is the main way to convert assets to cash to pay claims. Trustees are discouraged from selling small amounts nonexempt property unless sales proceeds will likely mean a sizeable payment on unsecured creditor claims (those not backed by any collateral). The trustee can challenge your claim that certain property is exempt.
The trustee can sell assets that are partially exempt, and should pay you the exempt amount from the sales proceeds before paying any creditors. For example, your car is worth $20,000, and your state’s law gives you an exemption of $5,000 for vehicles. The trustee can sell the car, pay you $5,000, and use the rest to pay creditor claims.
Steps in the sales process include:
- The trustee gives notice to parties in the case, usually 20 days, of the intent to sell property. Parties have the chance to object to the sale
- Sales are made by private sale or public auction
- The trustee has the duty to preserve sales proceeds until making payment on creditor claims
Reviewing Proofs of Claim and Making Payments
The trustee reviews creditors claims, called proofs of claim, and can object if any are improper. If claims are proper, the trustee makes distributions or payments to creditors, following the priority or order for payment set out in bankruptcy law.
Specific Trustee Duties in Chapter 7 and Chapter 13
Trustee responsibilities can vary somewhat, depending on the type of bankruptcy case.
Trustee Duties and Chapter 7
In a Chapter 7 case, the trustee has the duty to administer the case and represent the interests of unsecured creditors. Bankruptcy reform laws in 2005 added the duty to provide certain notices if there are claims for domestic support obligations.
Most Chapter 7 cases are “no-asset,” meaning there are no nonexempt assets to sell to pay creditors. In these cases, the trustee:
- Conducts the meeting of creditors
- Investigates the debtor’s assets, claimed exemptions and the right to a discharge
- Sends required notices related to domestic support obligations, if applicable, and, ensures that the statement of intention provisions are followed
The trustee then files a report stating that no assets have been found. Once the deadline for objections to discharge has passed and the debtor receives a discharge, the case is closed.
Trustee Duties and Chapter 13
A trustee has added duties in a Chapter 13 case, mainly administering the debtor’s reorganization or payment plan. Related duties include:
- Appear at hearings related to the plan, such as plan confirmation or modification, or hearings on property valuation
- Advising the debtor on matters other than legal matters
- Helping the debtor perform under the plan, and making sure payments are made
Take charge of your finances by understanding how bankruptcy will work for you and get the fresh start bankruptcy law provides.
Questions for Your Attorney
- Is the method for selling assets up to the trustee alone, and what if I disagree?
- Is the trustee’s support needed if I have true need to modify my Chapter 13 payment plan?
- If I disagree on the valuation and sale of an asset, is it hard to challenge the trustee’s decisions?