A chapter 7 bankruptcy, known as a fresh start bankruptcy because the debts of the bankrupt debtor are totally forgiven, is the most common form of bankruptcy in the United States. In 2019, approximately 1,000 chapter 7 bankruptcy trustees (“Trustee”) will administer approximately 450,000 chapter 7 cases. These men and women play a vitally important role in the bankruptcy system. Trustees are often referred to as “panel trustees” because they are appointed by the United States Trustee to a panel in each judicial district. Once Trustees are appointed to the panel, chapter 7 cases generally are assigned through a blind rotation process. The Trustee collects assets of the debtor that are not exempt under the Bankruptcy Code, liquidates the assets, and distributes the proceeds to creditors. Trustees are not government employees, however, they work in concert with the United States Trustee and the bankruptcy courts to ensure the efficiency and integrity of the bankruptcy system.
In 2016, Trustees collected over $3 billion for creditors in 43,543 closed cases. Over $170 million was paid to federal and state government claimants, including taxing authorities and over $6 million was paid to domestic support creditors. Out of every dollar collected, Trustee’s fees average 4.9% of gross receipts.
In 2017, Trustees collected over $2.6 billion for creditors in 35,705 closed cases. Over $145 million was paid to federal and state government claimants, taxing authorities and over $7.4 million was paid to domestic support creditors. Out of every dollar collected, Trustee’s fees averaged 4.8% of gross receipts.
The Role of the Trustee in Chapter 7 Bankruptcy
The primary duties and power of the Trustee in a chapter 7 bankruptcy case are:
Reviewing the Bankruptcy Petition and Related Documents
The Trustee reviews the debtor’s bankruptcy petition, schedules and statement of financial affairs. The Trustee also reviews documents related to the debtor’s debts, property, and income. It is the Trustee’s job to verify the debtor’s information and calculations using the debtor’s financial documents and other independent sources.
Examining the Debtor
Approximately 30 days after a bankruptcy case is filed, the Trustee conducts the section 341(a) meeting of creditors. Although creditors are invited to ask questions during the meeting of creditors, they rarely attend. It is the Trustee’s job is to conduct the meeting and ask the debtor questions about the information contained in the debtor’s bankruptcy documents.
The Trustee is responsible for liquidating non-exempt property and distributing the proceeds to creditors in accordance with the Bankruptcy Code’s distribution scheme. The non-exempt property can be real estate or personal property, e.g., motor vehicles or an income tax refund. Whether the property is exempt or not will depend on the exemption statutes of the particular State in which the bankruptcy is filed.
If there are no assets to liquidate, the trustee will file a report stating the case is a “no asset” case and that there will not be a distribution to creditors.
Avoiding Certain Transfers
The Trustee has the power to avoid fraudulent or preferential transfers. For example, if a debtor transferred property with the intent to hinder, delay or defraud creditors or if the debtor did not receive reasonable equivalent value in exchange for the transfer, the Trustee may be able to avoid the transfer and recover the fraudulently transferred property for the benefit of creditors. Further, if the debtor paid back certain creditors in preference over other creditors, the Trustee may be able to avoid these transfers and recover the money to distribute to creditors.
Objecting to the Discharge of Unworthy Debtors
The bankruptcy discharge is an order from the bankruptcy court which prevents creditors from initiating or continuing any legal or other action against the debtor to collect a discharged debt. Trustees may object to the entry of a debtor’s discharge if the debtor engages in certain activities, such as fraudulently transferring or concealing property, making a false oath or failing to obey a lawful order of the court.
Objecting to Improperly Claimed Exemptions
Depending upon the state in which an individual bankruptcy debtor is domiciled, the debtor may claim certain assets as exempt. Exempt assets are protected from creditors and may not be liquidated by Trustees. If a debtor improperly claims an asset as exempt, the Trustee may file an objection to the claim of exemption.
Criminal and IRS Referrals
Bankruptcy crimes come in many different forms and the evidence of those crimes are often discovered by Trustees while investigating the debtor’s financial affairs. When a Trustee discovers potential criminal conduct, the Trustee makes a referral to the United States Trustee’s office who then refers the matter to the local United States Attorney’s Office.
BAPCPA: The Unfunded Mandate
When Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), it in effect put in place an “unfunded mandate” by requiring Trustees to perform even more responsibilities in bankruptcy cases without funding any incremental compensation for Trustees to fulfill those responsibilities, further deepening Trustees’ inherent non-payment risk. Those additional duties included administering pension plans of corporate debtors, ensuring that persons to whom a debtor may owe child support receive proper notice of the debtor’s bankruptcy, confirming a debtor properly understands reaffirmation agreements and the consequences of his or her bankruptcy filing, and reviewing a debtor’s tax returns.