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The Chapter 7 Trustee, the Bankruptcy Estate, and Claims

When you first learn about Chapter 7 bankruptcy, there are some key elements to understand. These terms are important to know and can help you see the process, and the people along the way, clearly.

Person: The Case Trustee

When a Chapter 7 petition is filed, the U.S. trustee (or the Bankruptcy Court in Alabama and North Carolina) appoints an impartial case trustee to administer the case. They will help liquidate your nonexempt assets.

If all of your assets are exempt or subject to valid liens, the trustee will normally file a "no asset" report with the court, and there will be no distribution to unsecured creditors.

Most Chapter 7 cases involving individual debtors are no asset cases.

Process: The Case Trustee's Role

The primary role of a Chapter 7 trustee in an asset case is to liquidate your nonexempt assets in a way that maximizes the return to your unsecured creditors. The trustee accomplishes this by selling your items and property if:

  • It is free and clear of liens (as long as the property is not exempt) OR
  • It is worth more than any security interest or lien attached to the property and any exemption that the debtor holds in the property

The trustee may also attempt to recover money or property under the trustee's "avoiding powers." The trustee's avoiding powers include the power to:

  • Set aside preferential transfers made to creditors within 90 days before the petition
  • Undo security interests and other prepetition transfers of property that were not properly perfected under nonbankruptcy law at the time of the petition
  • Pursue nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law

Also, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the business for a limited period of time if such operation will benefit creditors and enhance the estate's liquidation. Businesses may want to consider filing Chapter 11.

Process: Filing of Claims

If the case appears to be an "asset" case at the outset, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. A governmental unit, however, has 180 days from the date the case is filed to file a claim.

In the typical no asset Chapter 7 case, there is no need for creditors to file proofs of claim because there will be no distribution. If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy Court will provide notice to creditors and allow additional time to file proofs of claim.

Although a secured creditor does not need to file a proof of claim in a Chapter 7 case to preserve its security interest or lien, there may be other reasons to file a claim.

Term: The Bankruptcy Estate

Commencement of a bankruptcy case creates an "estate." The estate technically becomes the temporary legal owner of all the debtor's property. It consists of all legal or equitable interests of your property as of the start of the case, including property owned or held by another person if the debtor has an interest in the property.

Generally speaking, the debtor's creditors are paid from the nonexempt property of the estate.

Process: Distribution of Estate Property

The Bankruptcy Code governs the distribution of the property of the estate. Under the Code, there are six classes of claims; and each class must be paid in full before the next lower class is paid anything.

The debtor is only paid if all other classes of claims have been paid in full. Accordingly, the debtor is not particularly interested in the trustee's disposition of the estate assets, except for the payment of those debts, which for some reason are not dischargeable in the bankruptcy case.

The individual debtor's primary concerns in a Chapter 7 case are to retain exempt property and to receive a discharge that covers as many debts as possible.

Questions About Your Chapter 7 Trustee, Bankruptcy Estate, and Claims?

Dealing with bankruptcy issues can be extraordinarily stressful and confusing. Luckily, a professional can help guide you through the process and ensure that you access all the protection that the law provides.

Contact a local bankruptcy attorney to learn how he or she can help fix your financial problems and put you on the path to a fresh start.

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