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What Does the Bankruptcy Trustee Do, and Why Are There 3 Different Kinds?

Oct. 11, 2013

Your main practical contact with the bankruptcy system when you file a case is the trustee. So let’s keep the different trustees straight.

The three kinds of trustees in bankruptcy are the Chapter 7 trustee, the Chapter 13 trustee, and the United States Trustee.

1. The Chapter 7 Trustee:

When you file a Chapter 7 “straight bankruptcy” case most of the time all of your assets are protected, or exempt. The Chapter 7 trustee’s primary job is to determine whether everything you own is indeed exempt. If they are not, this trustee collects those assets, sells them, and distributes their proceeds to your creditor. Or instead if you want to keep those assets, the trustee will usually negotiate a payment plan for you to pay for the right to keep them.

The Chapter 7 trustee reviews the documents your attorney files at court on your behalf, and others provided directly to the trustee. The trustee presides at and asks questions during your Meeting of Creditors. The trustee has the right to investigate further, by reviewing the public record, questioning others and such, although often has no need to do so. He or she can also pursue “fraudulent transfers” or “preferences”—money or assets that you either gave or sold to someone, or that creditors took from you.

2. The Chapter 13 Trustee:

The job of a Chapter 13 trustee is very different from a Chapter 7 trustee, reflecting how different a Chapter 13 “adjustment of debts” case is from a “straight bankruptcy” Chapter 7 one. In the first place, the Chapter 7 trustees usually are randomly selected from a “panel” of them so that you and your attorney do not know in advance who it will be. In contrast there is usually one “standing” Chapter 13 trustee assigned to a particular region, so you know who that will be in advance. Most Chapter 7 trustees work alone or with a very small staff; Chapter 13 trustees often have a dozen or more staff to assist him or her.

The Chapter 13 trustee’s initial main task is to determine if the payment Plan you and your attorney propose meets legal requirements. If the trustee believes your Plan is not adequate, he or she files objections with the court, but also works with your attorney to make adjustments to your Plan to satisfy any such objections. The trustee or an attorney on his or her staff usually presides at your Meeting of Creditors.

Your Plan payments are sent to the trustee, who disburses the money to your creditors as provided in your court-approved Plan, and informs the court when you have finished meeting the terms of the Plan. During the course of your case, the trustee monitors whether you are complying with Chapter 13 requirements, and files motions at court to address problems which may arise. It’s helpful to understand that the trustee in some respects acts on behalf of your creditors, but also has some obligation to help you complete your case successfully.

3. The U.S. Trustee:

While you will definitely hear about, and usually briefly meet your Chapter 7 or Chapter 13 trustee, you will seldom hear from and almost certainly never meet your local U.S. Trustee. The United States Trustees are the administrators and enforcers of the bankruptcy system. They are part of the U.S. Department of Justice, under the U.S. Attorney General. The U.S. Trustee (“UST”) appoints and supervises the panel of Chapter 7 trustees and the standing Chapter 13 trustees. The UST also to some degree monitors the administration of bankruptcy cases, especially business Chapter 11 “reorganization” cases. In consumer bankruptcies they are most directly involved with raising objections to the eligibility of debtors to file Chapter 7 cases, when appropriate. The UST can, in situations of abuse of the bankruptcy laws, refer potential bankruptcy crimes to the U.S. Attorney for investigation and prosecution.

Upcoming blogs will discuss how your attorney and you work with these trustees to have a smooth bankruptcy case.