A bankruptcy trustee is an official appointed by the bankruptcy court to handle the administrative tasks associated with a particular bankruptcy case. Trustees are not judges; they might be lawyers, but that isn't a job requirement. The trustee's tasks include reviewing the filer's bankruptcy forms, conducting the meeting of creditors (also called the 341 meeting), and managing the filer's bankruptcy estate.
The trustee is paid a percentage of what he or she can collect for the filer's creditors, either through taking and selling the filer's nonexempt property in a Chapter 7 case or through a Chapter 13 filer's repayment plan. This gives the trustee a strong incentive to make sure a filer's creditors receive as much as possible in the bankruptcy process.
The Trustee's Role in Chapter 7 Cases
In a Chapter 7 case, the trustee reviews the filer's bankruptcy forms and might investigate the filer's financial situation, at least briefly. For example, a trustee might search public records to find out whether the filer owns real or personal property (such as a vehicle) that wasn't reported in the bankruptcy forms. The trustee also conducts the creditors' meeting, at which the trustee and any creditors who show up can question the filer about his or her bankruptcy forms and financial situation.
If the filer owns any nonexempt property -- property that isn't protected by a state or federal exemption -- the trustee can take it, sell it, and distribute the proceeds to the creditors (less the percentage the trustee gets to keep from the deal). Exemption laws vary from state to state, but they often protect basic necessities, such as an inexpensive car, clothing and household furnishings, and some equity in a home, among other things. (You can find out more in Bankruptcy Exemptions: What Do I Keep When I File for Bankruptcy?, which includes links to each state's exemption rules.)
In many Chapter 7 bankruptcies, all of the filer's assets are exempt, which means there's nothing for the trustee to take. Here are some examples of property that might not be exempt:
- If the debtor has substantial equity in a home, beyond the amount that's protected by the exemptions available, the trustee will determine whether the cost of taking the house and selling it would be worth the amount creditors would be likely to receive from such a sale.
- If the debtor owns an expensive car (or more than one car, regardless of their value), the trustee will evaluate whether it's worth taking, storing, and selling the car.
- If the debtor owns luxury or expensive items that are not protected by an exemption, the trustee will weight the costs of sale versus the expected sales price. For example, if a debtor owns a boat, a grand piano, a valuable collection of fine art, or high-end electronic equipment, the trustee might decide to take and sell it.
If you have valuable nonexempt property that you want to keep, you may be able to negotiate an arrangement with the trustee. For example, perhaps you have a roughly equal amount of exempt property you are willing to give up. Or, you may be able to "buy back" your nonexempt property by coming up with a cash payment, perhaps by borrowing money from friends or family.
The Trustee's Role in Chapter 13 Cases
In a Chapter 13 bankruptcy, the trustee reviews the filer's paperwork and finances, and handles the meeting of creditors, just as in a Chapter 7 case. The trustee also handles the centerpiece of a Chapter 13 case: the repayment plan. In Chapter 13, the filer repays some or all debts over three to five years. Some debts (such as child support and back taxes) must be paid in full in Chapter 13; others can be paid only in part or not at all, depending on the filer's income and expenses. While the plan is in effect, the trustee will collect the filer's monthly payments and periodically send the filer information about who has been repaid and how much.
The trustee reviews the repayment plan, hears creditor objections (if any) and works with the filer to come up with a plan that can be carried through. The trustee collects a portion of each payment the filer makes under the plan, so it's to the trustee's benefit to make sure those payments are as high as possible.
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Working With the Trustee
As you can see, trustees have a lot of power in the bankruptcy system. It's to your benefit to develop a good working relationship with the trustee who will handle your case, particularly if you have a Chapter 13 case or you intend to negotiate for your nonexempt property (in Chapter 7). To get off on the right foot, it's important to be complete and honest in your bankruptcy forms. If you make a mistake, let the trustee know right away. And answer any questions the trustee has fully and accurately.