The Role of the Bankruptcy Trustee in Chapter 7

When a Chapter 7 debtor files for Chapter 7 bankruptcy, the court appoints a bankruptcy trustee to oversee and administer the case. The Chapter 7 bankruptcy trustee is responsible for the following things:

• reviewing the bankruptcy petition and supporting documents
• examining the debtor, and
• selling property for the benefit of your creditors.

Understanding the Chapter 7 Trustee's Role

The trustee receives a small fee for examining your paperwork and a percentage of any assets sold. This payment structure gives the trustee incentive to carefully scrutinize the debtor's property, including any property sold or transferred before the bankruptcy filing. Although the trustee must be fair to the debtor, their interests aren't always aligned. Therefore, how much the trustee will help you will depend on the individual trustee.

Here are the primary duties of the bankruptcy trustee in Chapter 7 bankruptcy.

The Chapter 7 Trustee Reviews the Bankruptcy Petition

Filing for bankruptcy involves completing a petition and other bankruptcy schedules and paperwork. In these documents, you'll disclose personal and financial information about your debts, property, income, and the state of your financial affairs. Also, you'll likely have to send the bankruptcy trustee things that will substantiate the information you provide in your paperwork, 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 paystubs to make sure the figure is accurate.

Examining the Chapter 7 Debtor

Approximately a month after you file your case, you must attend the 341 meeting of creditors in front of the bankruptcy trustee. Although your creditors ask you questions during the hearing, 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 about the information contained in your bankruptcy documents while you are under oath.

Selling Chapter 7 Bankruptcy Assets

The Chapter 7 bankruptcy trustee is also responsible for selling property that the debtor cannot protect and distributing the funds to creditors. Here's how it works.

In Chapter 7 bankruptcy, you can keep, or "exempt," a certain amount of your property, such as household furnishings, clothing, and a qualifying retirement account. The particular assets that you can protect will depend on your state's exemption statutes.

• When you have nonexempt property. Any nonexempt property—property you own that's above and beyond the amount allowed by your state—will be sold by the trustee to pay your creditors. It's important to determine what will happen to your property before you file for Chapter 7 bankruptcy. You don't have an automatic right to dismiss your case, and many judges will not allow you to do so just because you didn't realize the trustee would sell your property. (Find out more in Bankruptcy Exemptions by State.)
• When you don't have nonexempt property. If there aren't any nonexempt assets, the trustee will prepare a report stating your case is a "no-asset" case and that there won't be any distributions to creditors.

Sometimes the debtor and trustee disagree about the exemption status of a particular asset. In such cases, the bankruptcy judge will make the final determination.

If you have property to turn over, you or your attorney will make arrangements with the trustee to do so.

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 (undo) 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 on your property, the trustee can avoid that as well and sell the property free and clear of the lien. This situation is unusual. It's most likely to happen if a friend or family member is the creditor and fails to prepare the loan documents properly or record the lien.