The Chapter 7 Trustee, the Bankruptcy Estate, and Claims

Bankruptcy can be a confusing process. Title 11 of the United States Code, or 11 U.S.C., codifies the law relating to bankruptcy. The Supreme Court, in the landmark case of Local Loan Co. v. Hunt, held that the bankruptcy process exists to provide “the honest but unfortunate debtor … a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt."

You should be familiar with some key elements to understand bankruptcy law. Terms such as trustee, bankruptcy estate, and claims can help you understand bankruptcy. Continue reading for an explanation of each term and how they relate to bankruptcy.

The United States Trustee

A list of events will follow when a debtor files for bankruptcy protection. For instance, upon filing a Chapter 7 bankruptcy petition, any causes of action previously held by the debtor become property of the bankruptcy estate. A debtor must disclose all potential causes of action under Coastal Plains, 179 F.3d 197, 208 (5th Cir. 1999).

The bankruptcy filing will also trigger an automatic stay, preventing creditors from pursuing debtors while the stay is pending. Besides a bankruptcy petition, Section 1007(b) of the Federal Rules of Bankruptcy Procedure (Fed. R. Bankr. P.) states that a debtor must file:

  • 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

Additionally, a U.S. trustee, or the Bankruptcy Court in some states, appoints an impartial case trustee to administer the bankruptcy filing at the commencement of the case. A debtor must provide their social security card and most recent tax returns to the trustee, along with other essential forms and documents. The trustee will help liquidate a debtor's assets. The trustee will also classify claims, such as unsecured claims and secured claims, according to different priority levels.

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

The Trustee's Role

The primary role of a bankruptcy trustee in an asset case is to take on your fiduciary responsibility and liquidate your nonexempt assets to maximize the return to your unsecured creditors. The trustee's fees, along with attorney's fees, are usually paid upon liquidation. 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 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

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, including corporations and partnerships, may want to consider filing Chapter 11 and looking into bankruptcy reorganization/repayment options and operating the business as a debtor-in-possession.

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. This deadline is 180 days from the date of the case if the creditor is a governmental unit.

In the typical no-asset Chapter 7 case, creditors do not need to file proofs of claim because there will be no distribution. If the trustee later recovers assets for distribution to unsecured creditors, the bankruptcy judge will notify creditors and allow additional time to file proofs of such claims.

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.

The Bankruptcy Estate

The commencement of a bankruptcy case creates an estate. The debtor's 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.

Distribution of Estate Property

The Bankruptcy Code governs the distribution of the property of the estate. Under the Bankruptcy Code, there are six classes of claims, and each class must be paid in full by liquidating such property 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 debts not dischargeable in the bankruptcy case.

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.

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

Relief is available under a Chapter 7 bankruptcy regardless of the amount of your debt or whether you are insolvent. A bankruptcy lawyer can help guide you through this complex process. If you have any questions about bankruptcy proceedings or need amendments made to your bankruptcy petition, contact a local bankruptcy attorney for more information and to learn how they can help with your financial affairs.

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