The Role of the Bankruptcy Trustee in Chapter 7

When you file for Chapter 7 bankruptcy, the court appoints a bankruptcy trustee to oversee and administer the case. The Chapter 7 bankruptcy trustee is responsible for:

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

But this is a small fraction of what the trustee will do, and, if you're like most filers, you won't appear before a Chapter 7 bankruptcy judge. The trustee will be your primary contact throughout the case.

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What Is a Bankruptcy Trustee?

A bankruptcy trustee manages your property in bankruptcy. Although many types of trustees exist in different areas of law, all trustees share the same legal responsibility to hold and administer assets in a particular way.

The Chapter 7 bankruptcy trustee is needed because you lose ownership of your possessions when you file. The trustee holds your property in a "bankruptcy estate" while your case remains open.

What Are the Duties of the Chapter 7 Bankruptcy Trustee?

The primary duty of the Chapter 7 trustee is to locate and sell assets for the benefit of your creditors. To do this, the bankruptcy trustee reviews the property listed in your bankruptcy paperwork, including "exempt" assets you claim you can keep by law.

The trustee will seize assets you agree aren't exempt, sell them, and distribute the sales proceeds to creditors (although many filers keep all or most of their property). If you and the trustee disagree about your right to a particular item, the trustee will bring the matter before a bankruptcy judge.

In addition to selling property, the Chapter 7 trustee's responsibilities include:

• reviewing your paperwork
• checking your identification
• interviewing you
• investigating and locating undisclosed assets
• reviewing creditors' proof of claim forms for payment, and
• paying creditors.

You'll also have duties. Your primary responsibility will be to work with the trustee and accommodate reasonable requests for additional financial information.

Important note about bankruptcy property. Be sure you understand what will happen to your property before you file. You don't have an automatic right to dismiss in Chapter 7, and many judges won't let you out of a case just because you didn't realize the trustee would sell your property. Consult a bankruptcy lawyer if you're unsure how to interpret your state's bankruptcy exemptions and other bankruptcy laws.

How Does the Chapter 7 Trustee Get Paid?

Although the trustee receives a small fee for most bankruptcy cases, a large part of a Chapter 7 trustee's income comes from selling your property.

Chapter 7 Case Type	Chapter 7 Bankruptcy Trustee's Pay
"No Asset" Case - Debtor Keeps Property	$60 from the bankruptcy filing fee
"No Asset" Case - Court Waives Filing Fee	$0
"Asset" Case - Trustee Sells Property	$60 from the bankruptcy filing fee 25% of the first $5,000 disbursed 10% of the next $45,000 5% of the next $950,000 3% of anything over $1,000,000

The chart above illustrates that the trustee gets a percentage of all funds paid to creditors, giving the trustee incentive to scrutinize your property. Although the trustee must be fair to you, don't expect the trustee to look out for your best interests. That's the job of your bankruptcy lawyer.

The Chapter 7 Trustee Reviews the Bankruptcy Petition

You'll disclose personal and financial information about your debts, property, income, and the state of your financial affairs in your bankruptcy schedules and paperwork. The bankruptcy trustee will review your filing and verify the information by comparing it to other documents you'll provide, like paystubs, tax returns, and banking statements.

For example, if you state that you make $3,000 monthly in your bankruptcy papers, the trustee will compare that against your paystubs and tax returns to ensure accuracy.

The Chapter 7 Trustee Examines You at the Meeting of Creditors

Approximately a month after you file your case, you must attend the 341 meeting of creditors in front of the bankruptcy trustee. The bankruptcy trustee's job is to conduct the 341 hearing and ask questions about the information contained in your bankruptcy documents while you are under oath.

Although your creditors ask you questions during the hearing, unless they feel that you are hiding assets, creditors rarely attend these hearings.

The Chapter 7 Trustee Recovers Prebankruptcy Payments

Another way the bankruptcy trustee finds money for creditors is by evaluating payments and property transfers made to creditors before filing. The trustee can recover many that occurred during the 90 days before bankruptcy if the transfer meets threshold amounts.

The look-back period increases to a year when the creditor is a family member, business associate, or another "insider." This rule exists because people typically choose to repay those close to them when money is tight. However, overly enriching some creditors and shortchanging others is unfair and not new (some of the oldest legal cases on the books involve transferring money to family members).

A trustee who finds a "preferential transfer" will direct the creditor to return the money or property to the bankruptcy estate.

The Chapter 7 Trustee Checks Liens

Most filers report "secured" loans in bankruptcy. Car loans and mortgages are typical examples of secured loans.

The buyer gives the lender a lien on the purchased property or other collateral in secured transactions. The lien ensures that the property's title can't be transferred without first paying the loan. Because this type of lien right survives bankruptcy, the bankruptcy trustee must pay a secured lender's loan after selling the property with the lien on it.

Why does this matter? If you owe a friend or family a debt secured by collateral, expect the trustee to investigate the claim. Here's why.

Friends and family members often fail to prepare loan documents properly or record the lien. And when done incorrectly, the trustee can disregard the lien. This situation doesn't happen often, but the payout can be substantial when it does. Find out more about liens in Chapter 7 bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.