The Chapter 7 Bankruptcy Trustee
Jan. 10, 2016
In bankruptcy usually your main adversary is the “trustee.” What does this person do? In what ways is he or she your adversary?
The Liquidator, Occasionally
You may have heard that Chapter 7 is the “liquidation” type of bankruptcy. But in most consumer cases there is nothing to liquidate, or sell, because everything that the debtor owns is “exempt”—protected from liquidation.
The Chapter 7 trustee is the official who works on contract with the bankruptcy court to determine if the debtors assigned to him or her have any assets that are not exempt. If there are any such unprotected assets the trustee takes possession of them, sells them, and distributes the proceeds to creditors based on a detailed priority system.
How the Trustee Knows What You Own and Whether It’s All Exempt
In most Chapter 7 cases the primary source of information for the trustee about your assets is the paperwork you and your attorney prepare and file at the bankruptcy court.
To a large degree bankruptcy operates on an honor system. You and your attorney put together documents with a bunch of information—dozens of pages of “schedules” or lists of your creditors and your assets and such, plus answers to numerous questions. You review these documents carefully with your attorney, and after making sure they’re accurate you sign them under penalty of perjury, and your attorney electronically files them at court. As you probably know, “perjury” means that it can be a crime to provide false information.
Among these documents is a list of the exemptions you’re claiming, which again usually shows that everything or just about everything you own is covered by the exemptions that the law provides you.
The “Meeting of Creditors”
The trustee presides over the so-called “meeting with creditors,” which happens about a month after your Chapter 7 case is filed. There the trustee asks you and sometimes your attorney questions following up on the information in the documents filed at the bankruptcy court, mostly focusing on the assets and claimed exemptions. (Even though it’s called a “meeting of creditors” often only the trustee, you, and your attorney attend.)
This official but relatively informal meeting usually lasts about 7 to 10 minutes. It may even seem like a formality as you go through it. That’s particularly true when the bankruptcy documents seem to point clearly to the fact that all your assets are exempt. If so, it’s not unusual for the trustee to ask just 3 or 4 simple questions and then perhaps (depending on local custom) “declare the case to be a no-asset case.” This means that everything is exempt, the trustee has no assets to deal with. You get to keep everything.
Other Trustee Tasks
The trustee does regularly ask debtors or their attorneys to provide additional information or documents, such as to clarify or verify what is in the bankruptcy documents. He or she can certainly also investigate independently or through the help of others. For example, if you owned a partially rebuilt classic car the trustee could ask an appropriate expert to look at it to determine if the value you assigned to it in the bankruptcy documents is reasonable.
If the trustee sees anything suspicious throughout any of this he or she could pursue the matter and then at some point potentially refer it to the United States Trustee. The U.S. Trustee is the enforcer of the bankruptcy system. This entity usually stays in the background in consumer bankruptcy cases, but part of its job is to oversee compliance with the bankruptcy laws and stop any perceived abuse of those laws. As far as debtor assets are concerned, the U.S. Trustee tends to get involved if a debtor fails to disclose significant assets or the prior sales or transfers of assets, and commits similar potential fraud and perjury.
These kinds of problems virtually never happen as long as you are honest with your attorney. Be candid and thorough with him or her so that potential problems can be nipped in the bud. Usually there are workable ways to do so, but only if your attorney knows about them in advance.
Yes, it’s the Chapter 7 trustee’s job to represent your creditors by finding non-exempt assets to liquidate and distribute to the creditors. And the trustee can turn you over to the “authorities” if he or she encounters any serious bad behavior. So the trustee is your legal adversary.
But most of the time none of those things happens. Your only contact with the trustee will often be nothing more than a short, reasonably friendly “meeting of creditors” that’s over before you know it.