What is a Bankruptcy Trustee?

As part of your Chapter 7 or Chapter 13 bankruptcy proceedings, the court will appoint an administrator to oversee your case. This person is known as a bankruptcy trustee. They will be making important decisions about your case.

You might wonder if the trustee is friend or foe. The truth is that the trustee is neither. This person is generally an attorney whose role is to serve as an impartial referee throughout the bankruptcy. Although the trustee will make recommendations to the bankruptcy court in accordance with the U.S. Bankruptcy Code, the judge ultimately has the final say in how your bankruptcy plays out.

Duties of the Bankruptcy Trustee

The bankruptcy trustee has several important duties. First and foremost, the trustee will review your financial documents to make sure that you have a legitimate bankruptcy case.

They might also search public records to see if you own any property that you didn’t reveal in your bankruptcy forms. It is important to be honest when you are providing financial information to the bankruptcy trustee, as they have the ability to recommend that the court dismiss your case.

The trustee is also tasked with reviewing and reversing any fraudulent or preferential transfers you may have made. If, for example, you favor a creditor (like a friend or family member) by repaying them a substantial amount of money, the trustee may try to take back that money and share it among your other creditors. To do this, the trustee will file a lawsuit against you called an adversary proceeding.

Finally, the trustee will hold the meeting of creditors, during which the trustee and your creditors will ask you questions about your bankruptcy forms and financial situation.

Once the trustee has investigated and verified your documents, they will take control of your assets. What they do with your assets depends on the type of bankruptcy you are filing.

The Bankruptcy Trustee in Chapter 7 Cases

In Chapter 7 bankruptcy, the trustee will gather all your nonexempt property. This is property that you are not allowed to keep, or “exempt,” under bankruptcy law. It is the trustee’s job to liquidate, or sell, your nonexempt property, and pay the proceeds to your creditors.

If you don’t have any nonexempt property, the bankruptcy trustee will report to the court that your case is a “no asset” case and inform your creditors that there will be no distributions.

The Bankruptcy Trustee in Chapter 13 Cases

As debtors who are eligible to file Chapter 13 bankruptcy keep their property during the course of their bankruptcy proceedings, the bankruptcy trustee’s role in a Chapter 13 bankruptcy is a little different. In these types of cases, the trustee’s primary role is to manage the Chapter 13 repayment plan.

The trustee will review your proposed repayment plan for accuracy and lawfulness, and propose changes to it if necessary. They will also ensure that your repayment plan is reasonably affordable. When your repayment plan is approved, the trustee is in charge of collecting payments from you and distributing them to your creditors.

Who Pays the Bankruptcy Trustee?

To ensure impartiality, the bankruptcy trustee receives a small flat fee for each case they work on. In a Chapter 7 bankruptcy, a trustee will receive a percentage commission (3-25%) on the assets that they successfully sell and distribute to your creditors. This commission is intended to incentivize the trustee to locate and liquidate as many assets as possible.

In a Chapter 13 bankruptcy, the trustee is paid out of your monthly repayment plan. By law, this fee cannot exceed 5% of the total payment.