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.

Table of Contents:

• What Is a Bankruptcy Trustee?
• What Are the Duties of the Chapter 7 Bankruptcy Trustee?
• How Does the Chapter 7 Trustee Get Paid?
• The Chapter 7 Trustee Reviews the Bankruptcy Petition
• The Chapter 7 Trustee Examines You at the Meeting of Creditors
• The Chapter 7 Trustee Recovers Prebankruptcy Payments
• The Chapter 7 Trustee Checks Liens
• Can I Contact the Chapter 7 Trustee?
• Contacting the Trustee About a Sensitive Concern or Potential Issue
• What to Say to the Bankruptcy Trustee
• Finding the Trustee's Contact Information

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 sell assets that aren't exempt and distribute the sales proceeds to creditors (although many filers keep all or most of their property). However, if you and the trustee disagree about the exemption status of a particular item, the bankruptcy judge will decide the outcome.

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

• 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 filing for Chapter 7 because you can't dismiss a Chapter 7 case without permission from the bankruptcy judge. The problem? Many judges won't dismiss your case 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.

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 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, suppose you state that you make $3,000 monthly in your bankruptcy papers. To ensure accuracy, the trustee would compare that figure against your paystubs and tax returns.

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, they rarely attend these hearings unless they feel you are hiding assets or want to determine whether they should ask the court to declare your debt nondischargeable.

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 repay those close to them when money is tight. However, paying 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

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

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 you can't transfer the property title 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.

The problem? Friends and family often fail to prepare loan documents properly or record the lien. And when done incorrectly, the trustee can sell the property and disregard the lien, meaning the lender doesn't get paid. Fortunately, this situation rarely occurs. Find out more about liens in Chapter 7 bankruptcy.

Can I Contact the Chapter 7 Trustee?

Yes, and it's often a good idea. You or your attorney can resolve many issues by contacting the trustee by phone or email before the 341 meeting.

Contacting the Trustee About a Sensitive Concern or Potential Issue

Don't be surprised if a disgruntled ex-spouse or an angry business partner comes to the meeting of creditors to accuse you of stealing or failing to disclose property in your bankruptcy paperwork. It happens more often than you might think.

Assuming you're the innocent party, you might be able to minimize potential damage by explaining the situation to the trustee sooner rather than later. But that isn't the only concern you might want to discuss privately. Here are a couple of others:

• sensitive medical issues you don't want to air publicly
• unusually high expenses, and
• any other issue you might need to discuss.

Discussing issues beforehand and providing needed documentation will make it more likely the trustee will conclude the 341 meeting after one appearance. If the trustee needs additional proof or more time to evaluate the case, you'll have to return another day.

What to Say to the Bankruptcy Trustee

Before talking with the trustee, you'll likely want to consult an attorney to ensure the call is in your best interests (always seek legal advice about potential bankruptcy fraud accusations). When you call, you might want to do the following:

• describe the property you're worried about
• ask what you can expect to happen, and
• answer the trustee's questions.

Depending on the property type, the trustee might give you particular instructions, such as to forward rental property or trust fund payments, or might arrange to set up a time to view the property. You might also find out the trustee will abandon the property, and you can keep it. In most cases, calling is worthwhile. You'll either be relieved to learn your property is not at risk, or you'll have time to acclimate to the trustee selling it.

Finding the Trustee's Contact Information

After you file your case, the court will send a notice called the Notice of Chapter 7 Bankruptcy Case. The trustee's name, address, phone number, and email address will appear at the bottom of the first page of the form.

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!

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.