The goal of every bankruptcy is to balance the rights and interests of the debtor (the person or company that files bankruptcy) against those of the debtor’s creditors (the people or companies owed money by the debtor). A bankruptcy judge is the final say when there are disputes on how to balance these competing rights and interests. However, in the most-often used types of personal bankruptcy, Chapter 7 liquidation and Chapter 13 reorganization, there is a person called a trustee appointed to the case. But what exactly is a bankruptcy trustee?
What is a Bankruptcy Trustee?
When a debtor commences their bankruptcy case, a “bankruptcy estate” is created, and is made up of all of the debtor’s interest in different kinds of property. Administration of the bankruptcy estate is the bankruptcy court’s main concern. This is where a bankruptcy trustee comes into play. These trustees are appointed to bankruptcy cases by the Office of the United States Trustee, which is part of the United States Department of Justice. Trustees have an obligation to oversee bankruptcy cases, and to take certain actions which vary depending on the kind of bankruptcy case.
What Are the Duties and Powers of a Bankruptcy Trustee?
Bankruptcy trustees have broad powers granted to them by the Bankruptcy Code. These powers vary depending on the kind of bankruptcy. Overall, bankruptcy trustees are given a great deal of deference by the Bankruptcy Court, and their view of a particular case is generally taken seriously by the Bankruptcy Judge.
In a Chapter 7 liquidation bankruptcy, a Chapter 7 trustee is referred to as an interim trustee, who is appointed randomly to the Chapter 7 case. The Chapter 7 trustee, in a sense, “becomes” the debtor for the purposes of administration of the bankruptcy estate. The Chapter 7 trustee becomes in legal possession of the debtor’s assets until such time as the trustee later “abandons” those assets back to the debtor. A Chapter 7 trustee has both the duty and power to sell the debtor’s assets and to take actions on behalf of the debtor’s bankruptcy estate. Some of a Chapter 7 trustee’s primary duties and powers include:
- Examining the debtor, and other non-debtors where necessary
- Reviewing the debtor’s bankruptcy petition and schedules
- Accounting for all of the assets of the bankruptcy estate
- Liquidating any of the debtor’s non-exempt assets
- Distributing any sale proceeds to allowed claims
- Challenging creditor claims, where necessary
- Objecting to the debtor’s discharge, where necessary
- Reporting all actions to the Bankruptcy Court
Compare the Chapter 7 trustee’s powers with those of the Chapter 13 trustee. Unlike a Chapter 7 trustee, a Chapter 13 is not in possession of the debtor’s assets. A Chapter 13 trustee must ensure that the debtor pays creditors at least as much as they would have received in a Chapter 7 case. However, the Chapter 13 trustee enforces this rule through a Chapter 13 plan confirmation process, and through enforcing the debtor’s compliance with the terms of the payment plan. To that extent, a Chapter 13 trustee’s main duties and powers include:
- Examining the debtor
- Reviewing the debtor’s bankruptcy petition and schedules
- Reviewing the debtor’s Chapter 13 plan
- Objecting, where necessary, to the debtor’s Chapter 13 plan
- Collecting and distributing Chapter 13 plan payments made by the debtor under the plan
- Moving to dismiss the debtor’s Chapter 13 plan for lack of compliance with the plan
As outlined above, the main difference between a Chapter 7 trustee and a Chapter 13 trustee is that a Chapter 13 trustee cannot force a debtor to sell their assets. Instead, a Chapter 13 trustee can move for dismissal of the Chapter 13 case for noncompliance with the plan’s terms. This is a crucial distinction, because sale of a debtor’s assets is a much more harsh outcome, in most cases, then dismissal of the underlying case.
What About Chapter 11 Trustees and Subchapter V Trustees?
In addition to trustees in Chapter 7 and Chapter 13 cases, it must be noted that a trustee can be apportioned to oversee a Chapter 11 case in some instances. Trustees are usually appointed in a Chapter 11 case where the Bankruptcy Court determines that the debtor is not fulfilling its duties as a debtor-in-possession. Also, in Chapter 11 case where a debtor elects to proceed as a Subchapter V case, there is a completely different “breed” of trustee called Subchapter V trustee appointed to the case. The main goal of a Subchapter V trustee is to have the debtor and their creditors achieve a consensual Subchapter V plan of reorganization.
As described above, trustees are an important part of most kinds of bankruptcy. How you engage with your bankruptcy trustee is, in a large part, determined by your pre-bankruptcy planning. It’s important to fully anticipate the likely perspective of the trustee in your given bankruptcy case before actually filing the case. Experienced bankruptcy counsel may leverage their insights into each kind of bankruptcy case, and their previous interactions with given trustees, to provide you with insights into how to proceed in your particular bankruptcy case.
Filing Bankruptcy with Middlebrooks Shapiro
Though bankruptcy has received a negative stigma over the years, there are many benefits of filing bankruptcy. If you are struggling under debt that seems crushing, bankruptcy may be a viable option for you. The attorneys on our team specialize in all types of bankruptcy from Chapter 7 and Chapter 11 to Chapter 12, Chapter 13, and Subchapter V. If you are curious about what your life could look like post-bankruptcy, book a free, no-obligation consultation with Middlebrooks Shapiro!
