Understanding the Crucial Role of a Bankruptcy Trustee
When individuals or businesses find themselves buried under a mountain of debt and seeking a fresh start, bankruptcy can provide the relief they desperately need. A key player in this legal process is the bankruptcy trustee. This blog post aims to shed light on the crucial role played by these trustees in navigating the complex terrain of bankruptcy proceedings, ensuring fairness for both debtors and creditors alike.
An Introduction to the Bankruptcy Trustee
The bankruptcy trustees are appointed by the bankruptcy court and are supervised by the US Trustee’s office. We have had the same Chapter 7 and Chapter 13 trustees in Oregon for many, many years. So, with our years of experience handling bankruptcy cases, we have dealt successfully with all of them.
They are paid by the bankruptcy court. They get a flat fee in “no asset” Chapter 7 cases and a percentage of the assets recovered in an asset Chapter 7 case. The Chapter 13 trustee has a budget that includes overhead and a profit that is approved by the US Trustee and funded by a percentage of the Chapter 13 plan payments.
Importance of a Trustee in Bankruptcy Proceedings
The bankruptcy trustees are key players because they decide how a case will proceed. Specifically, they review the paperwork and interview the person in bankruptcy (the debtor) at the meeting of creditors to see if the Chapter 7 case should be treated as a “no asset” case or in a Chapter 13 case if the plan payments are adequate and if treatment of creditors is appropriate. So the trustees in the bankruptcy process play a key role and the way in which they carry out their responsibilities will impact the debtor, the creditors, and the overall proceedings.
Deep Dive into the Trustee's Role in Various Types of Bankruptcy
One of the primary responsibilities of a bankruptcy trustee is to review the debtor’s financial situation. They may meticulously examine the debtor’s assets, liabilities, income, and expenses to assess how the bankruptcy should proceed. They are always looking for any potential fraudulent activities or hidden assets. This scrutiny helps prevent abuse of the bankruptcy system while maintaining integrity and fairness.
As part of the bankruptcy process, the trustee presides over the Meeting of Creditors. This meeting provides an opportunity for creditors to ask questions but usually none of them even participate in it. In most cases, it is just the trustee asking questions about the debtor’s financial affairs. The trustee makes sure that the meeting goes smoothly and efficiently and that the Debtor answers all questions and provides all the needed information.
Prior to the Meeting of Creditors, the trustee will require that the debtor provide additional documentation. We work with our clients to make sure that they give us everything that the trustee wants to complete their job of evaluating the case. This will help the hearing go smoothly.
The Trustee in Chapter 7 Bankruptcy
The trustee’s specific role in Chapter 7 bankruptcy is to determine if there are any non-exempt assets that should be liquidated or if there were any payments or transfers that should be avoided and the funds brought back into the bankruptcy to pay creditors.
A common example of a non-exempt asset is equity in a home that exceeds the homestead exemption. Another example is a tax refund that exceeds the available exemptions.
A common example of a payment that can be avoided is a repayment of a loan from a so-called insider, a friend, or a family member, within one year before the filing of the case.
The trustee can require the debtor to turn over non-exempt assets or can sell them to recover non-exempt equity. They can file litigation against the recipients of transfers or payments that can be reversed. The trustee is given a lot of power to collect any assets that are not exempt so that the proceeds can be distributed to creditors.
The Trustee in Chapter 13 Bankruptcy
The trustee’s role in Chapter 13 bankruptcy is to make sure that the plan payments meet the legal requirements and that the treatment of the creditors proposed in the Chapter 13 plan is correct. They have no role in formulating the Chapter 13 plan but instead, react and respond to the plan proposed by the attorney for the person in the Chapter 13 bankruptcy. Once a plan is approved, they collect the plan payments and distribute them according to the Court’s order approving the debtor’s repayment plan.
In general, they review the budget and the assets schedules to see if the Debtor shouldn’t be required to pay more under the formulas for Chapter 13 plan payments.
The first formula requires that the distribution to the creditors under the plan be at least as much as they would have received in Chapter 7. This analysis requires a focus on the assets and exemptions.
The second formula requires that the plan payments represent the debtor’s best effort to repay the creditors. This requires a close review of the budget schedules.
Of course, since we have worked with the Chapter 13 trustees so many times, we usually know just what they want and how to address their concerns so that we avoid many of the problems that can arise.
The Trustee in Chapter 11 Bankruptcy
The trustee in a Chapter 11 bankruptcy is usually the US Trustee. They conduct the Meeting of Creditors and review the Chapter 11 plan and disclosure statement. But they don’t, even technically, take possession of the Debtor’s assets. The Debtor in a Chapter 11 is known as the “Debtor-in-Possession” because they stay in control of all their assets. So the role of the trustee in Chapter 11 is really to review the paperwork, conduct the Meeting of Creditors and review the Chapter 11 plan. They don’t handle the Plan payments, like a Chapter 13 trustee does, but they do review, react, and respond to the Debtor’s plan to make sure that the payments are sufficient and that the plan meets all legal requirements.
The Trustee in Chapter 12 Bankruptcy
The trustee’s role in Chapter 12 bankruptcy, specifically designed for “family farmers” and “family fishermen” is larger than the role of the US Trustee in Chapter 11 cases and is a little more like the role of the Chapter 13 Trustee. They review the plan to make sure that it meets the tests for determining how much the payments should be. And, as in a Chapter 13 case, the plan payments go through the Chapter 12 Trustee. So they have a role in facilitating the implementation of a repayment plan but none whatsoever in managing the debtor’s operations.
The Trustee's Relationship with Debtors and Creditors
The bankruptcy trustees interact with both debtors and creditors, though they have much more contact with the debtor and the debtor’s attorney. In no asset Chapter 7 cases, the creditors don’t even file claims.
In most cases, the creditors are only involved if they have information that they think the trustee might use to pursue assets or if they want to get out from under the bankruptcy protection so they can recover their collateral if they aren’t getting payments.
How Does a Trustee Work with Debtors?
The trustee’s interaction with the debtor is limited to reviewing their financial information and conducting the meeting of creditors. They don’t guide them through the process or communicate directly with them. We handle all of the communication with the trustee and guide our clients through the process.
The trustee will let us know if there are additional questions or documents that are provided or if they have any questions or concerns about the case
If the trustee thinks that there are non-exempt assets or payments or transfers that can be reversed, they talk to us about it rather than our clients. We handle all of the negotiations with the trustee so our clients know that, if we are able to work out an acceptable alternative, it is the best deal available.
How Does a Trustee Work with Creditors?
The trustee’s role in dealing with the creditors is usually limited to reviewing their claims in an asset case and including them in their final report, ensuring they receive their due from the bankruptcy estate.
In some situations, the trustee might demand that a creditor return a payment made in the time leading up to the bankruptcy. Usually, the debtor can, for example, demand the return of wages garnished in the 90 days before the case. But that is possible only when federal bankruptcy exemptions are used. Where there is substantial equity in a home, for example, so that the debtor has to use the Oregon exemptions, the trustee can recover them.
Unraveling the Mystery of Bankruptcy Trustee Fees
Of course, the bankruptcy trustees get paid for their work. The way the fees are determined and the amount varies with the type of bankruptcy case.
How are Trustees Compensated in Bankruptcy?
In no asset Chapter 7 cases, the fee for the bankruptcy trustee is a fixed dollar amount that comes out of the filing fee. In asset Chapter 7 cases, the trustee is paid for their services with a sliding percentage of the money brought into the estate. This percentage is 25% of the first $5,000.00 and then 10% of the next $45,000.00 and then 5% of any amount up to $1,000,000.00 and 4% above that.
In a Chapter 13 case, the trustee gets a fixed payment based on a budget that is approved by the US Trustee that includes overhead and a profit for the trustee. It is funded from a percentage of all payments through the Chapter 13 plan and some payments, for example on the sale of property, based on payments made directly by the closing escrow.
Periodically, the US Trustee reviews the Chapter 13 Trustee’s books and sees if the percentage fee needs to be increased or could be decreased, based on whether it is adequately funding the operation of the Chapter 13 trustee’s office. and the impact of these fees on the overall bankruptcy process.
The bankruptcy trustee fees in a Chapter 11 case are based on a fee schedule and are calculated on the disbursements made by the Debtor-in-Possession. They can be very substantial and are a major expense in every Chapter 11 case.
Unraveling the Mystery of Bankruptcy Trustee Fees
The pivotal role a bankruptcy trustee plays in the process is clear. They are the face of the US trustee’s program and the one person in most cases who is responsible for seeing that the process works fairly and efficiently. We offer a free consultation with an experienced and caring bankruptcy attorney to get answers to any other additional questions you might have about the role of a trustee in a bankruptcy case. We handle the vast majority of the interaction with the trustee so our clients contact with them is usually limited to the 5-10 minutes when the trustee is questioning them as part of the Meeting of Creditors. And, of course, we meet with our clients to prepare them for that hearing and we are on the phone for the hearing as well and are always ready to jump in and help.
Does the trustee have access to my bank account?
The trustee does not have access to the debtor’s bank account but can demand that non-exempt money in it be handed over. This is very rare since usually, the money in your bank account is all or mostly exempt.
The bankruptcy trustee does require that you provide copies of recent statements for all bank accounts and they will definitely ask questions about any large deposits or withdrawals.
Often hidden assets are discovered by tips from neighbors or business competitors. And it is fairly common to have an ex-spouse or partner call in to the hearing to tell the trustee that they believe that the debtor is concealing assets. But sometimes they are discovered by a close and careful examination of the financial records the debtor is required to provide. The trustee will also sometimes look at public records to see if there are assets that have not been disclosed.
Can a creditor override a trustee's decision on how to handle a case?
Creditors have the right to question decisions made by a trustee. A basic principle of due process is notice and the right to be heard. So usually the trustee has to give a notice of how the case will be handled and a creditor who disagrees can ask the Bankruptcy Judge to overrule the trustee. However, they are not usually successful as the trustees are given wide latitude on how to handle their cases.
