When you file for Chapter 7 or 13, the court will appoint a bankruptcy trustee to oversee the case. The trustee’s will duties include:
- verifying the accuracy of your paperwork
- checking qualifications
- looking for signs of fraud
- conducting the 341 meeting of creditors
- finding money to pay your debts, and
- dispersing funds to creditors.
The trustee isn’t a judge and must remaining neutral. Even so, it would be wrong to expect the trustee to protect your interests. Here’s why.
The trustee receives only a nominal fee to review your petition. However, the trustee also receives a percentage of all of funds paid to creditors. If the trustee can find and pay out more of your money, the larger the trustee’s payday will be.
In this article, you’ll learn more about the role of the bankruptcy trustee.
The Bankruptcy Trustee Will Review Your Bankruptcy Paperwork
Seven days before the date set for the 341 meeting of creditors, you’ll provide documents (known as 521 documents) to the trustee, including:
- bank statements
- paycheck stubs
- tax returns, and
- other items required by your particular trustee.
The trustee will use the documents to verify the information in your petition, evaluate your assets, and look for fraud. You can expect the trustee to ask about any issues that surface at the 341 meeting of creditors.
For tips to help you get ready for your meeting, read How Should I Prepare for the 341 Meeting of Creditors in Bankruptcy?
The Bankruptcy Trustee Will Conduct the 341 Meeting of Creditors
The 341 meeting of creditors will likely occur in a conference room at the courthouse with up to ten other bankruptcy filers present. After taking roll call, explaining the process, and admonishing filers to answer questions truthfully, each filer will be called to the front.
When it’s your turn, the trustee will:
The trustee might also ask questions about particular entries in your bankruptcy paperwork. Common areas of questioning include:
- exempt property (assets you claim you can keep)
- figures used in the means test
- dependents, and
- property valuation.
Once the trustee completes the questioning, you’ll answer questions from creditors (but they rarely come to meetings). If nothing more needs to be done, the trustee will conclude the meeting; otherwise, it will be continued to another day.
The Bankruptcy Trustee Will Recover Hidden Assets
No one likes to lose property in bankruptcy. So a filer might be inclined to sell a car to a friend cheap, or give valuable property away—or pay off a loan to a relative while leaving the remaining creditors with nothing.
But, because these types of transactions aren’t fair to other creditors, the trustee will be on the lookout for valuable property that has been given away, hidden, or sold for less than what it’s worth, as well as preferential payments made to favored creditors.
While understanding property issues is fairly simple, preferential payments can be a bit trickier. A preferential payment is defined as a payment:
- to a creditor as payment on a debt you owed
- while you were insolvent
- within 90 days before you filed for bankruptcy, or within one year if the payment or transfer was to an insider creditor, such as a family member, and
- that enables the creditor to receive more than it would have if your property and assets were all distributed through Chapter 7 bankruptcy.
For example, a preferential payment or transfer would likely exist in any of the following situations:
- You pay back a $2,000 loan from a parent or sibling within one year of the date you filed bankruptcy.
- You pay off a large credit card balance 90 days before filing for bankruptcy
- A friend or family member pays one of your creditors in exchange for work for the friend or family member
- You give a creditor a lien or mortgage on some land you own to secure payment of an old debt you owe 90 days before filing your bankruptcy case.
However, some preferential payments are defensible, such as paying domestic support obligations. If the court finds that a payment is a preference, the creditor will have to give back the money or property, and it will be divided among your creditors.
The Bankruptcy Trustee Will Pay Creditor Claims
In bankruptcy, a “creditor claim” is a debt owed to a creditor. When money is available, a creditor must submit a proof of claim to receive a portion of the funds.
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) or it doesn’t accurately reflect the amount owed—the trustee (or another party) will file an objection to the claim.
After the bankruptcy court resolves disputes and the date to file claims passes, the trustee will pay creditors according to priority payment rules. Higher priority claims get paid before those with a lower priority. For instance, recent tax debt and domestic support obligations would have to be paid in full before a credit card claim would receive anything.
Duties of Chapter 7 and 13 Bankruptcy Trustees
Your bankruptcy trustee will have different responsibilities depending on whether you file for Chapter 7 or 13.
Chapter 7 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 everything you own. 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. As long as you don’t own a lot of luxury goods, and you have a modest amount of equity in your home or car, you’ll likely be able to keep all of your property.
Chapter 13 trustee
The trustee distributes funds to creditors in a Chapter 13 case, too, but the funds come from another source—your income. Unlike Chapter 7, you can keep all of your property. Instead, you’ll pay either the value of your nonexempt property or your disposable income, whichever is greater, through your repayment plan. 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 at least $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.