What does a Chapter 7 bankruptcy trustee do?
Bankruptcy in Washington State can be a difficult and overwhelming process, both for individuals and for businesses. The process involves debtors, creditors, lawyers, as well as people known as “trustees.”
In all cases, a bankruptcy trustee is appointed by the United States Trustee to oversee the process and ensure that it is carried out in a lawful manner. But what exactly does a bankruptcy trustee do? In this post, we will review the role of a bankruptcy trustee in consumer bankruptcy cases and the responsibilities they have.
What is a bankruptcy trustee?
First and foremost, they’re a person like you and I. Chapter 7 Bankruptcy trustees are appointed by the United States Trustee to a panel to “oversee” bankruptcy cases. Every chapter 7 bankruptcy case is assigned to a trustee.
The trustee is, in theory, an impartial party who is not aligned with either the debtor or the creditors, and their duty in a Chapter 7 case is to “manage the sale of the nonexempt property and then administer the distribution of the proceeds to creditors.” [Source]
What are the responsibilities of a bankruptcy trustee?
There are several key duties associated with the role of a trustee:
Review Bankruptcy Petitions and Documents
One of the first tasks that the bankruptcy trustee associated with a case will undertake is to review the debtor's bankruptcy petition along with the debtor’s supporting documents. The trustee will examine things to determine whether the debtor has committed fraud or is otherwise abusing the bankruptcy process. For instance, if a petitioner earns a salary clearly in excess of the median income yet files under Chapter 7 without any mitigating facts, or when significant amounts of money have been funneled to a third party just prior to the bankruptcy filing (this includes outsized payments made to creditors), the trustee has a duty to make an issue under these facts.
2. Examine the debtor under oath during the meeting of creditors (aka: the 341 hearing).
The trustee will ask questions of the debtor during this mandatory hearing. These meetings are often perfunctory affairs where, if the petition is orderly, things go smoothly. They occur roughly a few weeks to a month after the filing of the bankruptcy petition. Moreover, in Washington State’s Eastern District, these meetings are carried out “telephonically,” which means via telephone.
During the hearing, the debtor will be sworn in. After this, the trustee will ask if the debtor was actually the person who signed the petition. The trustee will ask if the debtor actually read the petition and related documents of the bankruptcy filing before they signed them. The trustee is also going to inquire as to whether the debtor is familiar with the information contained in the petition and related documents. The trustee will ask if the information contained in the petition, schedules, statements, and related documents of the bankruptcy filing is true and correct. The trustee will also want to know if the debtor identified all its assets and listed all its creditors in the filing documents, and whether the debtor previously filed for bankruptcy. If you provide bad information, or outright lie, the trustee will seek to have your bankruptcy petition dismissed.
3. They Sell Debtor Assets to Pay Creditors
The first step in asset liquidation is identifying and valuing the debtor's non-exempt property. Trustees assess the value of various assets, including real estate, vehicles, personal belongings, and financial holdings. Truth be told, the trustee can only (1) sell assets that other people are willing to buy, and (2) sell assets that make sense to sell given the costs of selling and the likely return. For instance, even if you have equity in your car/jewels/card collection, there needs to be a market in order for these items to be sold. In the case of real property, like your house, the trustee may consider the opinion of a real estate appraiser, an offer to purchase, or even a Zillow estimate when determining if it’s worth it to try and liquidate your house.
Bear in mind that it costs money to sell real property, and it’s not always worth it if the return is minimal–that is, the amount of the proceeds are so small, after accounting for the homestead exemption you’d be due after closing. Anyway, t’s a good idea to speak with a qualified bankruptcy attorney to get a better understanding of your situation.
Other things to know:
Under 341 (c), no member of the court (e.g. judge) is allowed to be present. Thus, a trustee is not allowed to threaten to bring a judge into the room during a 341 hearing. [Credit to the Bankruptcy 101 podcast and Utah bankruptcy attorney Roger Kraft for this useful inference.]
Good to Know: Always wait until the trustee has finished asking their question before replying, even when the answer is obvious or a ‘no-brainer.’ It’s not just good manners, but it leaves a good impression with the trustee.
Fun Facts: (1) Chapter 7 bankruptcy trustees “are often referred to as ‘panel trustees’ because they are appointed by the United States Trustee to a panel in each judicial district.” Source. (2) Also fun to note: some people will mistakenly address the panel trustee as “your honor” during the 341 Meeting of Creditors. You don’t have to call them “your honor.” (3) According to the Department of Justice, trustees are generally assigned to cases through a blind rotation process.
