What Is a Trustee in Bankruptcy?

According to the U.S. Trustee Program,​ bankruptcy trustees have various obligations and powers. These powers and responsibilities vary depending on the type of bankruptcy case. Trustees work with both debtors and creditors to ensure that the bankruptcy process goes smoothly.

This article explains what a trustee in bankruptcy does, including practical responsibilities. It also discusses how you’ll interact with your trustee if you do move forward with a bankruptcy filing.

Whether you’re just thinking about filing bankruptcy or have already started working on your bankruptcy petition, it’s a good idea to contact a local bankruptcy attorney. They know the law and will guide you through the bankruptcy system.

Trustee’s Role in Different Types of Bankruptcy

Chapter 7 bankruptcy and Chapter 13 bankruptcy are the two most common types. Chapter 7 is commonly referred to as a liquidation bankruptcy, where the trustee sells a debtor’s nonexempt assets and distributes the proceeds to creditors. In a Chapter 13 bankruptcy, the trustee helps the debtor devise a three- to five-year payment plan to help reorganize their debt. Chapter 13 cases are often referred to as a reorganization bankruptcy.

The bankruptcy trustee’s duties depend on the type of case they are handling. This includes attempts to move or hide assets before or during filing. If the Chapter 7 trustee alleges that the debtor reports false information or fails to disclose the existence of this property, the debtor may face bankruptcy fraud charges. It is the trustee’s duty to uncover this fraud.

The Bankruptcy Estate and Bankruptcy Trustee

Understanding how the bankruptcy estate works makes it easier to know the role of the bankruptcy trustee. Under bankruptcy law, a bankruptcy filing creates a bankruptcy estate. This estate is composed of all the debtor’s property, both real and personal.

The bankruptcy estate is a separate legal entity from the bankruptcy debtor. The commencement of a bankruptcy case creates an estate, which technically becomes the temporary legal owner of all the debtor’s property. In some states, the bankruptcy court orders an individual to act as the trustee.

This estate consists of all legal or equitable interests of any property the debtor owns on the date they file their petition, including another person’s property if the debtor has an interest in the property. Since the bankruptcy estate is not a person, a bankruptcy trustee must step in to oversee and protect the estate. The trustee will perform various duties required by law and the Bankruptcy Code, such as liquidating assets to pay creditors.

The United States Trustee vs. the Case Trustee

The United States Trustee and the case trustee are not the same. A U.S. trustee is a federal employee with the Department of Justice. They appoint an impartial case trustee to manage the bankruptcy starting at the commencement of the case.

Private trustees are not federal employees. They are private individuals who handle your bankruptcy case, liquidate assets, review monthly payment plans, and interact with you and your creditors throughout the bankruptcy proceedings.

What Does a Bankruptcy Trustee Do?

A bankruptcy trustee‘s duties vary depending on the type of case and a debtor’s financial situation. A Chapter 13 trustee has different duties than a trustee in a Chapter 11 bankruptcy, and so on.

When a debtor files for bankruptcy protection, it triggers certain events. For instance, when you file a Chapter 7 bankruptcy​ petition, any lawsuits or other causes of action become the property of the bankruptcy estate. The bankruptcy filing will also trigger an automatic stay, which protects the debtor from legal action by creditors during bankruptcy proceedings. The stay begins as soon as you file your bankruptcy petition.

The Trustee in Chapter 7 Bankruptcy Cases

For an individual to qualify for Chapter 7 bankruptcy proceedings, they must pass the means test. The trustee administers the Chapter 7 bankruptcy case.

A Chapter 7 trustee has powers and abilities similar to those of an overseer in a Chapter 13 bankruptcy case. There are several differences in these types of bankruptcies as well.

Some of the primary duties and powers of a trustee in a Chapter 7 liquidation bankruptcy​ case include:

• Round up all of a debtor’s property

• Sell the property in the bankruptcy estate

• Participate in the 341 creditors’ meeting

• Distribute proceeds to creditors

• File an objection to property exemptions

• Object to a bankruptcy discharge where grounds exist

At any point in the bankruptcy proceedings, the trustee can make a decision that affects you in an adverse way, which makes retaining a skilled bankruptcy attorney an option to consider. They’ll work hard to protect your assets and ensure that the court discharges any debts eligible for discharge.

The Trustee’s Role in Asset Cases

The primary role of a bankruptcy trustee in a Chapter 7 is to liquidate the debtor’s non-exempt assets. Any proceeds from the sale of the debtor’s property will help pay off the estate’s creditors. These proceeds also pay the trustee’s fees.

If all of the debtor’s assets are exempt or subject to valid liens, the trustee will typically file a “no asset” report with the court, and unsecured creditors will receive nothing. Secured creditors have the right to demand possession of any property that is collateral to the debtor’s debts.

The Trustee’s Avoiding Powers

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

• Set aside preferential transfers made to creditors within 90 days of the filing date

• Undo security interests and other pre-petition transfers of property that the debtor did not properly perfect under non-bankruptcy law at the time of filing the petition

• Pursue non-bankruptcy claims, such as fraudulent conveyance and bulk transfer remedies available under state law

If the debtor is a business, the bankruptcy court may authorize the trustee to operate the business for a limited period. This only occurs if such operation will benefit creditors and enhance the estate’s liquidation.

Required Documents for the Trustee

It is the trustee’s job to ensure that the bankruptcy filer submits all necessary documents under the Bankruptcy Code. If a debtor fails to submit the requisite forms and documentation, the trustee can recommend that the bankruptcy judge dismiss the debtor’s bankruptcy case.

According to the Federal Rules of Bankruptcy Procedure (Fed. R. Bankr. P.), a debtor must file the following documents and forms:​

• Schedules of assets and liabilities

• A schedule of current income and expenditures

• A statement of financial affairs

• A schedule of executory contracts and unexpired leases

Debtors must also provide their Social Security card and most recent tax returns to the trustee, along with other essential forms and documents.​

Distribution of Assets

The Bankruptcy Code​ governs the distribution of the debtor’s property. Under the Bankruptcy Code, there are six classes of claims. The debtor must pay each class in full before paying the next class of creditors. In general, the trustee pays the debtor’s creditors from the proceeds of selling the estate’s nonexempt property.​

The debtor will receive any funds remaining after the trustee pays all creditors in full. Since the point of filing a Chapter 7 bankruptcy is to relieve oneself of debt they cannot afford, there is rarely sufficient money to pay creditors in full.

The individual debtor’s primary concern in a Chapter 7 case is to retain exempt property and receive a discharge covering as many debts as possible. If they had enough liquid assets to pay off their creditors, they wouldn’t have filed bankruptcy in the first place.

The Trustee in Chapter 13 Bankruptcy

Unlike a Chapter 7 bankruptcy, debtors in a Chapter 13 reorganization bankruptcy keep their property. A Chapter 13 bankruptcy trustee’s job involves negotiating a payment plan with the debtor’s creditors rather than liquidating the debtor’s property.

A trustee’s primary duties in a Chapter 13 case include:

• Reviewing the debtor’s proposed payment plan​

• Making objections to the plan as necessary

• Receiving or collecting payments from the debtor according to the established repayment plan

• Distributing payments to creditors

To qualify for Chapter 7 bankruptcy, a debtor must demonstrate that their income is lower than their state’s median income. For a Chapter 13 bankruptcy, the debtor must show that their total debts (secured and unsecured) are less than the statutory thresholds.

Once the trustee approves a debtor’s Chapter 13 petition, the debtor must develop a reasonable repayment plan acceptable to all parties involved and the court. The case will move forward if this is accomplished, with the trustee’s job limited to ensuring that the debtor makes their monthly payments as scheduled and that the creditors receive their portion of the payment.

Still Have Questions About Trustees? Call a Bankruptcy Lawyer

The trustee will play a big part in most consumer bankruptcies, making it important that you understand the trustee’s role. Given the power the bankruptcy trustee holds, consider consulting with an experienced bankruptcy attorney to handle your case. They’ll ensure that the trustee does not treat you unfairly or force you to accept a repayment plan that you cannot afford.