What Is a Trustee in Bankruptcy?

A bankruptcy trustee is an individual appointed by the court to manage the debtor’s assets and act as an intermediary between debtors, creditors, and the bankruptcy court. Their primary responsibility includes collecting and distributing payments, monitoring debtor's financial activities, and ensuring compliance with bankruptcy regulations.

The U.S. trustee program states bankruptcy trustees have various obligations and powers, depending on the type of bankruptcy case. The two most common types of bankruptcy proceedings are Chapter 7 and Chapter 13. Chapter 7 is commonly known as liquidation, where the trustee sells nonexempt assets of the debtor to distribute to creditors. Meanwhile, in Chapter 13 bankruptcy, the trustee helps the debtor devise a payment plan that often lasts between three to five years.

This article will discuss a trustee's responsibilities in the bankruptcy process.

The Bankruptcy Estate and Bankruptcy Trustee

To understand a trustee's role, you must first understand the bankruptcy estate. Under bankruptcy law, a bankruptcy filing creates a bankruptcy estate composed of the debtor's property. The bankruptcy estate is a separate legal entity from the bankruptcy debtor.

Of course, since the bankruptcy estate is not a person, a bankruptcy trustee must step in to oversee the estate in bankruptcy court. The trustee will perform various duties required by law and the Bankruptcy Code. You usually will not meet your trustee until the meeting of creditors.

What Does a Bankruptcy Trustee Do?

A bankruptcy trustee's duties vary depending on the type of case and the circumstances of a particular debtor and their creditors. In short, a bankruptcy trustee does different things in every case.

The Trustee in Chapter 7 Bankruptcy Cases

The duties and powers of trustees in Chapter 7 and Chapter 13 are similar in some ways. Many distinctions come down to the difference between each type of bankruptcy. Here are some of the primary duties and powers of a trustee in a Chapter 7 liquidation bankruptcy case:

1. Round up all of a debtor's property

2. Sell the bankruptcy estate's property

3. Participate in creditors' meeting

4. Distribute proceeds to creditors

5. Object to a bankruptcy discharge where grounds exist

For an individual to qualify for Chapter 7 bankruptcy proceedings, their income should fall below their state's median income level. This proceeding might also require the debtor to sell some properties to pay the creditor.

The Trustee in Chapter 13 Bankruptcy

Unlike the gathering and sale of property involved in Chapter 7 liquidation bankruptcy, debtors in Chapter 13 reorganization bankruptcy keep their property during the bankruptcy. A trustee's primary duties in these cases deal with handling payments as well as:

1. Reviewing the debtor's proposed payment plan

2. Making objections to the plan as necessary

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

4. Distributing payments to creditors

In Chapter 13 bankruptcy proceedings, anyone with unsecured and secured debts below $2,750,000 is eligible. The trustee creates a payment plan that often spans between three to five years. In most cases, those who opt to file for Chapter 13 bankruptcy can keep their properties and assets.

Are Bankruptcy Trustees Federal Employees?

No. The United States trustee, a federal employee of the Department of Justice, appoints the bankruptcy trustee to administer the bankruptcy estate. Private trustees who administer bankruptcy cases are not federal employees either.

More Questions About a Trustee in Bankruptcy? Talk to a Bankruptcy Lawyer for Legal Advice

The trustee will play a big part in most consumer bankruptcies. Whether reviewing claims by creditors, claims by debtors, or challenging other aspects of a bankruptcy case, the bankruptcy trustee plays a central role in how the bankruptcy proceeds.

Are you considering bankruptcy due to your financial affairs? Talk to an experienced bankruptcy attorney for any legal issues you may have.