When a Chapter 7 bankruptcy is filed, an impartial bankruptcy trustee is appointed to oversee and administer the case. The Chapter 7 bankruptcy trustee has many responsibilities that come with this appointment.
Here are the main duties of the bankruptcy trustee in Chapter 7 bankruptcy.
Reviewing the Bankruptcy Petition and Documents
When you file bankruptcy you file a petition and other papers with the court disclosing your personal and financial information. Your bankruptcy papers include information about your debts, your property, your income, and the state of your financial affairs. In addition to filing your papers with the court, you usually must send the bankruptcy trustee certain documents such as pay stubs, tax returns, and information about your assets.
It is the trustee’s job to review your bankruptcy petition and verify the information and calculations using your financial documents and other independent sources. For example, if you state that you make $3,000 a month in your bankruptcy papers, the trustee will compare that against your pay stubs to make sure the figure is accurate.
Examining the Bankruptcy Filer Under Oath
Approximately a month after you file your case, you must attend a hearing in front of the bankruptcy trustee. This is called the 341(a) meeting of creditors because any of your creditors are also free to come and ask you questions during the hearing. However, unless they feel that you are hiding assets, creditors rarely attend these hearings. The bankruptcy trustee’s job is to conduct the hearing and ask you questions while you are under oath about the information contained in your bankruptcy documents.
Liquidating Nonexempt Assets
Probably the most well-known role of the Chapter 7 bankruptcy trustee is selling the nonexempt assets of the bankruptcy debtor. In a Chapter 7 bankruptcy you are allowed to keep a certain amount of your property (the specific amounts depend on which state your case is filed in). These are protected assets that are “exempt” from the bankruptcy. If you own property above and beyond the amount allowed by your state, it is a nonexempt asset and the trustee may sell it to pay your creditors. (To learn more about exemptions and how they work, see our Bankruptcy Exemptions area.)
The Chapter 7 bankruptcy trustee determines the value of property to see if you own any nonexempt assets that should be sold to pay your creditors. If there are no nonexempt assets, the trustee will prepare a report stating there will be no distribution to creditors. But if the trustee finds any nonexempt assets, he or she must liquidate and sell them in a way that gives the maximum amount of return to your creditors.
Avoiding Certain Transfers or Security Interests
The bankruptcy trustee also has certain powers to avoid any preferential transfers or improperly executed security interests. If you transferred property to someone else or paid back certain creditors you prefer over others (such as family members) before filing bankruptcy, the trustee may be able to avoid these and get the money or property back to distribute it among all your creditors. Similarly, if a creditor (such as a car company) did not properly create a lien or security interest in your property, the trustee can avoid that as well and sell the property free and clear of the lien.
(Learn about bankruptcy trustee compensation and fees here.)