Red Flags in Your Bankruptcy Papers: What the Trustee Looks For

The trustee will look for these red flags in your bankruptcy petition and schedules -- they might lead to more questions or possible problems.

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When you file for Chapter 7 or Chapter 13 bankruptcy, the court appoints a bankruptcy trustee to review your bankruptcy paperwork and administer your case. The trustee represents your bankruptcy estate and has a duty to maximize the amount that your unsecured creditors will get paid. When the trustee reviews your bankruptcy petition, he or she will be on the lookout for certain red flags. Red flags often lead to more questions, and may point out problems with your case.

For more information on the role of the trustee, see our topic area on The Bankruptcy Trustee.

Red Flags in Your Bankruptcy Paperwork

Below we discuss some of the most common red flags the trustee will look for in your bankruptcy papers.

Missing or Undervalued Assets

If you file for Chapter 7 bankruptcy, the trustee has the power to sell your nonexempt property to pay your creditors. In addition, the trustee receives a commission from the sale of your property. This means that a Chapter 7 bankruptcy trustee will review your bankruptcy petition closely to make sure you didn’t omit or undervalue any of your assets. (To learn more about how your property is treated in Chapter 7 bankruptcy, see Your Property in Chapter 7 Bankruptcy.)

The value of your nonexempt property also plays a role in Chapter 13 bankruptcy. In Chapter 13 bankruptcy, you must pass the "best interest of creditors" test. To satisfy the best interest of creditors test, you must pay your unsecured creditors at least an amount equal to the value of your nonexempt assets through your Chapter 13 repayment plan. As a result, a Chapter 13 bankruptcy trustee will also be interested in the amount of property you own.

Understated Income

Your income is important to the trustee in both Chapter 7 and Chapter 13 bankruptcy. If you want to qualify for Chapter 7 bankruptcy, your disposable income must be low enough to pass the bankruptcy means test. In Chapter 13 bankruptcy, you must pay all of your disposable income into your repayment plan.

This means that both a Chapter 7 and Chapter 13 trustee will review your income carefully. Pay stubs that don’t match the income in your paperwork are a red flag.

Unreasonably High Expenses

The trustee looks at your expenses in conjunction with your income to make sure you qualify for Chapter 7 bankruptcy or are paying all of your disposable income into your Chapter 13 plan. If you have unusual or excessive expenses, the trustee will question you about them in more detail.

Payments Made to Creditors Shortly Before Bankruptcy

If you made payments to your creditors shortly before filing for bankruptcy, you will typically need to disclose them on your Statement of Financial Affairs. The trustee has the power to avoid (cancel) certain payments you made to creditors prior to filing your case. These are called preferential payments or transfers.

If you make a payment to a preferred creditor (such as a family member) shortly before filing for bankruptcy, the trustee may be able to get the money back for the benefit of all your creditors. This means that recent payments to creditors may trigger a red flag with the trustee.

To learn more about when the trustee can avoid preferential payments, see Preference Payments to Creditors Prior to Bankruptcy: When the Trustee Can Get the Money Back.

Recent Transfers of Property

If you transfer any property out of your name shortly before filing for bankruptcy, it will attract the trustee’s attention. You must disclose certain recent property transfers on your Statement of Financial Affairs.

If certain conditions are satisfied, the trustee may be able to avoid the transfer and get the property back for the benefit of your bankruptcy estate. In addition, if you transferred the property in order to defraud your creditors, the trustee may ask the court to deny your discharge and refer your case for criminal investigation.

by: , Attorney

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