Working With the Bankruptcy Trustee

When you file for bankruptcy, a “Trustee” is appointed to your case.

It’s essential to understand the role of the trustee and who they “works” for.

Although the court appoints the trustee, the trustee’s job is to get as much property as possible to be sold and the proceeds distributed equitably to your unsecured creditors, according to “priority” rules — determining who gets paid first — under federal and state law.

Almost all of your dealings with the bankruptcy court will be with the trustee assigned to your administering your case, not the bankruptcy judge.

The bankruptcy judge is only there to rule on disputed legal issues and issue your “discharge” order — the piece of paper that officially cancels your debts upon completing a successful filing — which is the ultimate goal of bankruptcy.

What does the Trustee do in a Chapter 7 case?

Bankruptcy Code § 323 states that the trustee is the representative of the “bankruptcy estate” with the capacity to sue and be sued.

The Bankruptcy Code defines the trustee’s duties and obligations:

• Section 704 defines the statutory duties of the trustee in a Chapter 7 bankruptcy case, and, under § 704, the primary task of the trustee is to “reduce to money the property of the estate for which such trustee serves” that is: to “liquidate” the assets and distribute the proceeds to your creditors. (Note this the job in Chapter 7 (“liquidation”) bankruptcy is different than it is in Chapter 13 (“pay over five years”) bankruptcy. 
• Other relevant duties include ensuring that the debtor performs their intention (regarding secured debts) as specified in § 521(a)(2)(B) (See debtor’s “statement of intention” as provided in Form ____),
• investigate the financial affairs of the debtor (see, “What is a 341 meeting?”),
• and “if advisable, oppose the discharge of the debtor.” (see “What kinds of debts can be discharged in bankruptcy?” and “Things that might make your bankruptcy case fail.")

How Are Trustees Paid?

Bankruptcy Code § 326 says that a trustee’s compensation is based upon a percentage of the property of the estate the trustee administers. As a result, a trustee has a financial incentive to maximize the property of the estate. Consequently, discussions or disputes with a Chapter 7 trustee will primarily focus on what is property of the estate.

How Trustees Can Increase the size of the “Bankruptcy Estate.”

The whole point of bankruptcy is ensuring everyone gets their rightful share of the “pie” when there’s not enough pie. Or, to put it a more legal way: to provide an orderly distribution of available assets (“the pie”) to all creditors based on the priority outlined in federal bankruptcy law. 

The trustee’s job is to make that “pie” as large as legally possible. What follows is a list of ways they can try to do that.

Undoing “Preferential Transfers” That You Made Before Filing

One tool the trustee has is the authority to undo any “preferential transfers”. That is, any money or property you transferred to someone else just before (generally up to 180 days before) filing bankruptcy.

Under this power, the trustee will be very interested in undoing any recent repayments of debts you made to your relatives or friends just before you filed for bankruptcy, as these are called a “preference.”

The trustee can reverse these transactions (i.e., claw the money back) and reclaim it for the “bankruptcy estate” because, by repaying these people before just going bankrupt, you have “preferred” some people you owe money to over others -- and bankruptcy does not allow this, because bankruptcy law has strict rules about who gets priority when it comes to claiming any available assets you may have.

Wiping out invalid liens on your property to increase equity to be distributed to creditors

Suppose you own a house with a second mortgage or have several liens on your property. In that case, the trustee may look to “void” some of those liens if doing so will increase your home equity to the point that it is no longer fully protected by applicable homestead exemption laws. 

To find private trustees by State and chapter, follow the links below: