Understanding the Important Role of the Bankruptcy Trustee

Who is a bankruptcy trustee?

Understanding the role of the bankruptcy trustee and the source of his authority over your case can make the process less stressful. The trustee is neither your adversary nor your advocate. Trustees treat debtors with respect and cordiality, and sometimes offer helpful suggestions. However, if a trustee suspects that a debtor is lying or withholding information, the relationship can become adversarial. As long as you follow your attorney’s advice and fulfill your responsibilities as a debtor, you will not run into conflicts with the trustee.

Source of the trustee’s authority

Today’s bankruptcy law originated with the Bankruptcy Code enacted in 1978. The Code created the trustee system in effect today. The Office of the United States Trustee is a division of the United State Department of Justice, and is charged with responsibility for the administration of bankruptcy cases throughout the U.S. The system is designed to facilitate the smooth and efficient processing of bankruptcy cases. It allows routine cases to be processed from start to finish without the involvement of a Bankruptcy Judge. Judges become involved in contested matters and other matters that require a judicial hearing as a matter of law.

How does the trustee’s involvement work?

One person is appointed as the United States Trustee for the whole country. The country is divided into regions, and each region is led by an Assistant United States Trustee, and others are appointed for each state. On a more local level, each state has one or more Standing Chapter 13 Trustees, who administer only Chapter 13 cases. For Chapter 7 cases, a number of attorneys are appointed as “Panel Trustees.” The number is determined by case volume. Chapter 7 cases are assigned to a Panel Trustee on a somewhat randomized basis to prevent “trustee shopping.” Chapter 7 Trustees are private attorneys who often have their own bankruptcy law practice.

What does a bankruptcy trustee do?

In Chapter 7 cases, the bankruptcy trustee reviews the debtor’s bankruptcy petition and schedules that are filed with the court, and also documents submitted directly to the trustee that are not made public. The latter category includes proof of I.d. and social security number, tax returns, proof of income and proof of the value of assets. One of the most important duties of the trustee is to conduct the Section 341 Meeting of Creditors. (This is such an important topic that a separate blog is devoted to it.) A bankruptcy trustee is responsible for collecting and selling the debtor’s non-exempt property, managing the proceeds for the benefit of the creditors, and scrutinizing all financial dealings. (If you are unsure what the terms “exempt property” and “non-exempt property” mean, read the blog on that topic.) The trustee may also recover and liquidate property transferred from the debtor to third parties prior to the case being filed. After the property has been sold, the trustee will distribute the money (referred to as a “dividend”) to creditors who have filed proof of what is owed to them.

In Chapter 13 cases, the Chapter 13 trustee has all of the same duties as a Chapter 7 trustee, but in addition must review the debtor’s chapter 13 plan and object to it if it does not meet the requirements of Chapter 13. The Chapter 13 Trustee must also keep track of all of the payments made by the debtor, and move to dismiss the case if the debtor does not make the payments required.

Conclusion

Understanding and appreciating the essential role and powers of a bankruptcy trustee allows one to navigate through the bankruptcy process with increased awareness, knowledge, and foresight, ensuring a smoother journey towards financial stability and integrity.

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