The Role of the Chapter 7 Bankruptcy Trustee

Chapter 7 filers interact almost exclusively with the Chapter 7 bankruptcy trustee throughout the Chapter 7 process. This article explains the Chapter 7 trustee's role, including what the trustee does behind the scenes and the potential impact on your case.

Appointment of the Chapter 7 Bankruptcy Trustee

If your case is like most, you won't appear before a bankruptcy judge when you file for Chapter 7. Instead, shortly after filing for Chapter 7 bankruptcy, the court will assign a bankruptcy trustee to monitor your case. (11 U.S.C. § 701.)

The trustee will remain responsible for your case until it's closed, usually three to four months after filing. However, your case could stay open longer if the trustee is involved in more time-consuming tasks like selling property or litigating ownership issues.

Learn how long your Chapter 7 bankruptcy case will last.

The Chapter 7 Bankruptcy Trustee's Overall Role

The trustee's primary responsibilities are to evaluate your financial condition and ensure your creditors receive payment when funds are available. But doing so requires overseeing many moving parts. (11 U.S.C. § 704.)

For instance, the trustee will check that you comply with bankruptcy procedures, such as filing necessary forms and attending required hearings. The trustee will also investigate your financial affairs, try to find assets for creditors, and oppose creditor claims and your "bankruptcy discharge," the order eliminating qualifying debts, when appropriate.

Also, when you file for bankruptcy, ownership of your property transfers from you to the bankruptcy estate. (11 U.S.C. § 541.) The trustee evaluates and takes care of the "estate property" during your case.

In most instances, you won't be affected by the temporary transfer. However, because of the trustee's responsibilities, if you own a business and file for bankruptcy as a sole proprietor, the trustee might close it during the case unless you have liability insurance.

The Chapter 7 Bankruptcy Trustee's Specific Duties

Some of the trustee's responsibilities could impact your case more than others. Here's what the Chapter 7 trustee will do during your case.

The Chapter 7 Trustee Verifies Bankruptcy Filings

Part of the trustee's job is determining that you've filed all forms and provided all required supporting documents. This includes your bankruptcy filings—the bankruptcy petition, schedules, statements, and proof of credit counseling—and the financial documents you must provide before attending the 341 meeting of creditors, the one hearing all filers must attend. (11 U.S.C. § 521.)

The Chapter 7 Trustee Compares Filings and Supporting Documents

Your filings and documents give the court a picture of your financial situation, and together, the trustee uses them to check for fraud or abuse. For instance, the trustee might use pay stubs, bank account statements, and income tax returns to verify your income. The trustee might also check property values and evaluate the reasonableness of your monthly expenses.

Plan to provide up to six months of pay stubs and bank statements, two years of tax returns, and two years of profit and loss statements if you are self-employed. Some trustees require additional documents, such as retirement, mortgage, and car note statements, proof of liability insurance, and marital settlement agreements.

Learn more about documents needed for the creditors meeting.

The Chapter 7 Bankruptcy Trustee Resolves Inconsistencies

When something in your filing appears out of line, the trustee's office will ask you to justify your disclosure. You might receive the request at the 341 creditors meeting, or the trustee might contact you beforehand.

The Bankruptcy Trustee Conducts the Meeting of Creditors

Most bankruptcy filers' only contact with the Chapter 7 trustee occurs at the 341 creditors meeting, the one appearance all filers must attend. (11 U.S.C. § 341.) The meeting typically takes place several weeks after filing in a hearing room or virtually if social distancing is necessary.

The bankruptcy court schedules multiple matters during the same hour, so you'll likely watch several meetings before your turn. The predictable format allows the trustee to handle cases efficiently, with each case usually lasting less than ten minutes.

What to Expect at the Creditors Meeting

After providing instructions to the group, the trustee calls each filer to the front in the order listed on the hearing calendar. The trustee then checks identification and swears the filer in before asking questions about financial affairs.

Questions the Chapter 7 Bankruptcy Trustee Will Ask

The trustee will begin with standard questions all filers must answer and follow with specific questions arising from the filer's particular case. The trustee will be particularly interested in the estate property and your right to keep it using bankruptcy exemptions. For instance, the trustee might ask how you arrived at the value of your home, car, or other asset.

The trustee will also inquire about previous property transfers and any other matter that could help bring additional property into the estate. Qualification questions relating to the means test or previous bankruptcy filings are also common.

Creditors can also attend and ask questions, although they rarely show up. Although fraud-related issues arise occasionally, it's usually only after a creditor tips off the trustee to potential wrongdoing.

The most common creditor complaints involve concerns about a filer who obtained credit based on inflated income and assets, creditors currently suing the filer in state court actions, and disgruntled business partners and ex-spouses.

Learn more about questions asked at the creditors meeting.

When the Chapter 7 Trustee Will Conclude the Creditors Meeting

If the bankruptcy trustee believes everything is in order, the trustee will "conclude" or end the meeting. If further questioning or additional documents are needed, the trustee will continue the meeting until another day.

The date the trustee concludes the meeting is important because it triggers certain deadlines. For instance, the ability to object to a filer's bankruptcy exemption ends 30 days after the conclusion of the meeting of creditors. (F.R.B.P. Rule 4003. Exemptions.)

Learn what happens after the 341 meeting of creditors.

Other Chapter 7 Trustee Responsibilities

Most cases pass through the Chapter 7 process without any glitches. In those cases, the meeting of creditors is the last time the Chapter 7 trustee does any substantive work on the matter.

However, sometimes, the trustee's responsibility to ensure creditors receive the money owed under bankruptcy law continues after the creditors meeting. For instance, it's relatively common for a trustee to sell the assets a filer reports they can't protect in the bankruptcy petition.

In a small percentage of cases, the trustee might suspect that the filer wasn't completely honest about property ownership or unfairly made prebankruptcy payments to favorite creditors. In these instances, the trustee might investigate hidden property, undo prebankruptcy creditor payments or property sales, or file litigation.

When the Chapter 7 Bankruptcy Trustee Will Sell Property

Not everyone loses property in bankruptcy. If you're like many, exemption laws will protect all your property, and the trustee will have nothing to take. Yours will be a "no asset" case.

However, the trustee will sell the nonexempt property you list in your petition—property not covered by a bankruptcy exemption–if the sale will generate money for creditors. Such cases are known as "asset" cases.

Cases receive an asset or no-asset label when you file, depending on whether you could protect all property with exemptions. In an asset case, creditors receive a deadline date for filing "proof of claim" payment forms for the trustee's review. (F.R.B.P. Rule 3002. Filing Proof of Claim or Interest.)

When the Chapter 7 Bankruptcy Trustee Will Investigate Hidden Property

Don't assume the trustee won't look for property other than what you've disclosed. One of the trustee's primary jobs is determining whether you truthfully listed everything you own and previous property transfers.

During the trustee's investigation, the trustee will look for signs that you've hidden property, and you might or might not know about an investigation behind the scenes. However, if the trustee takes one of the following actions, the trustee's suspicions will be clear:

• demands a property inspection
• requires an inventory of your home, storage space, or safe deposit box, or
• sets a questioning session similar to a deposition called a "Rule 2004 Examination" (F.R.B.P. Rule 2004. Examination)

If the trustee, a creditor, or another interested party files a motion or complaint, you'll have a short time to respond. Address it promptly by bringing it to your bankruptcy lawyer's attention.

When the Chapter 7 Bankruptcy Trustee Will Reverse Prebankruptcy Property Payments and Transfers

Trustees do more than look for undisclosed property. For instance, the Chapter 7 trustee can take steps to recover money paid to someone before bankruptcy and distribute the funds among all creditors if it qualifies as a "preferential" payment.

The purpose of the rule is to prohibit filers from paying their favorite creditor shortly before bankruptcy to the detriment of other creditors. (11 U.S.C. §§ 547, 548.) This situation commonly occurs when prebankruptcy payments are made to relatives, business partners, and other "insiders" or exceed the maximum amount allowed by statute. The rule can apply to property as well as money.

Learn more about the clawback provision and preferential transfers.

When the Chapter 7 Bankruptcy Trustee Will Challenge Defective Security Interests or Liens

The trustee can object to a lender's security interest or lien if the trustee believes it's defective or fraudulent. This situation often occurs when a transaction is between individuals rather than commercial lenders and rarely arises in bankruptcy.

The trustee will closely scrutinize "kitchen table" deals because of the potential to recoup substantial money for creditors. Here's a top-to-bottom explanation of this somewhat unusual and complicated situation.

The background. Lenders often receive security interests or liens in property when lending large loan amounts. The property becomes collateral the lender can sell to ensure payment if the borrower doesn't pay as agreed. Mortgages and car loans are examples of loans that typically require a lien on the purchased house or car.

The effect of liens in bankruptcy. A valid security interest or lien blocks access to money the trustee could use to pay multiple creditors. It happens because a lender or creditor with a security interest or lien on a property is entitled to full payment from the sale before the trustee can pay other creditors. A trustee won't sell property secured by a lien or another security interest unless the equity exceeds the amount required to pay the lienholder, sales costs, and the trustee's fee.

The trustee's workaround. The lender's right to full payment disappears if the trustee shows the security interest or the lien isn't legal. All property equity becomes available for creditor payment. Simple ways a trustee can challenge a creditor's secured interest include demonstrating that the lender forgot a necessary signature or didn't record the document correctly. The trustee might also show that the filer executed a fraudulent property lien to prevent the trustee from selling the property.

Finding such a defect will eliminate the lender's interest in the property, allowing the trustee to sell the property and distribute the funds more widely amongst a larger group of creditors.

As noted above, this situation is rare. Individual lenders unaware of lien requirements—often friends or family members—are the most at risk of losing a security interest to a bankruptcy trustee.

Example. When Art filed for Chapter 7, he owed a $15,000 vehicle loan on a car worth $15,000. Art had purchased the vehicle at a local car dealership, and the lender's contract and lien were correctly drafted, signed, and recorded. Because the valid lien would require the trustee to pay the lender $15,000 before paying other creditors, selling the car would have been pointless. Nothing would have remained to pay Art's other debts, sales costs, or the trustee's fee.

Example. When Cami filed for Chapter 7, she owed her father $15,000 for a car worth $20,000. She protected the vehicle from bankruptcy creditors by listing the $15,000 vehicle loan as a secured debt and claiming her state's $5,000 motor vehicle exemption. However, the trustee discovered that even though Cami had signed a valid sales contract, she hadn't given her father a lien against the vehicle. The omission created an "unsecured" rather than secured vehicle loan, making available all vehicle equity for creditor payment, minus Cami's exemption. As a result, the trustee sold the vehicle, gave Cami $5,000 for the vehicle exemption, paid the sales costs and trustee's fee, and divided the remaining sales proceeds between Cami's unsecured creditors. Ultimately, because of the defective security interest, Cami's father received only a fraction of what she owed.

When Your Chapter 7 Bankruptcy Will End

Most cases end after about four months, but not all. Bankruptcy courts strongly encourage trustees to conclude Chapter 7 cases within a year when possible. A year is usually enough to complete a bankruptcy trial known as an "adversary proceeding" or sell most real estate.

Sometimes, unusually lengthy Chapter 7 cases can create confusion for filers. Here's why.

The bankruptcy court issues the debt discharge about four months after filing, even when other issues remain outstanding. Because a debtor's primary goal is to eliminate debt, it's not unusual for a filer to assume the case is over only to discover its ongoing status after applying for a loan or lease. Learning more about when a bankruptcy case ends can help you avoid surprises and, when necessary, take steps to ensure your case is closed promptly.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help. Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.