The Role of the Chapter 7 Bankruptcy Trustee

Learn about the role of the Chapter 7 bankruptcy trustee in your bankruptcy case.

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When you file for Chapter 7 bankruptcy, the court assigns a bankruptcy trustee to your case. The Chapter 7 bankruptcy trustee comes from a pool of neutral bankruptcy trustees. The bankruptcy trustee handles your bankruptcy case from the beginning until discharge -- which is typically three to four months after filing.

Here’s what the Chapter 7 bankruptcy trustee is charged with doing in your case:

The Bankruptcy Trustee Reviews Your Bankruptcy Petition and Other Documents

Your bankruptcy case begins when you file your Chapter 7 petition, schedules, and supporting documents with the court. These documents tell the court about your debts, assets, income, intentions with respect to certain types of property and contracts, and the state of finances. After you file, you must send supporting documents to the trustee, including income verification (such as six months of pay stubs or a profit and loss statement if you are self-employed) and usually two years of tax returns. Some trustees require that you bring even more documents.

The bankruptcy trustee reviews your bankruptcy documents to make sure that you are being honest with the court and that there are no signs of fraud or abuse. The trustee might ask you for more information if he or she has questions about your financial situation.

The trustee also checks your financial information to see if it is accurate and consistent across the board. If you said that your gross income is $1,500 a month for the last six months, then the trustee will look at your pay stubs, bank account statements, and income tax returns for consistency.

In your bankruptcy schedules (part of the bankruptcy papers that you file), you must state the value of each of your assets. The bankruptcy trustee will review your valuations to make sure they look right. If something looks out of line, the trustee's office will ask you for more information to justify the amount you stated on your papers.

The Bankruptcy Trustee Handles the Meeting of Creditors

The bankruptcy trustee also runs the meeting of creditors in your case. The meeting of creditors (also called the 341 hearing) occurs four to six weeks after your filing. You must attend. Creditors may also attend and ask you questions, although they rarely show up. The 341 meeting usually lasts no more than five minutes.

At the meeting of creditors, the bankruptcy trustee will ask you questions after you have taken an oath to tell the truth. The trustee will likely question you about income – this provides another way for the trustee to check for accuracy and consistency with the other information you provided in your schedules. The trustee might also ask about your assets – such as how you came up with the value of your home or car.

If the bankruptcy trustee doesn’t think there are any assets of yours to sell to repay unsecured creditors, he or she will likely state that you have a "no asset" case. If yours is a no-asset case, the trustee will later file a report saying that there will be no distribution to creditors.

The Bankruptcy Trustee Sells Your Nonexempt Assets

In a Chapter 7 bankruptcy, the bankruptcy trustee is in charge of selling your nonexempt assets in order to repay your unsecured creditors. Nonexempt assets are those assets that are not protected by exemption laws. If a particular item of property is protected by an exemption law, then the trustee cannot touch it. (To learn more about how exemptions work, and which types of property are exempt in your situation, see Bankruptcy Exemptions.)

Reverses Certain Prebankruptcy Property Transfers

In certain circumstances, the Chapter 7 trustee has the authority to get back property that you transferred to someone before you filed for bankruptcy (also called a preferential transfer). Bankruptcy law prohibits you from hiding assets or favoring one creditor over another right before you file for bankruptcy. If you do, the trustee can take the property back so that it can be distributed fairly among your creditors. (To learn more, see the Clawback Provision and Preferential Transfers.)

Challenging Defective Security Interests or Liens

The trustee also may attack a lender's security interest or lien if the trustee believes it’s defective. When you purchase property using credit, for example, your house or car, you often give the lender a security interest or lien in the property. Sometimes the creditor makes a mistake on the lien or security interest document. For example, the lender might have forgotten an important signature or didn’t record or file the document properly. If there is such a defect, the trustee may be able to eliminate the lender's interest in the property and sell the property for the benefit of all creditors.

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LA-NOLO5:DRU.1.6.3.20141021.28794