Archive for February, 2011

What Does a Bankruptcy Trustee Do in a Bankruptcy Case?

Wednesday, February 23rd, 2011

A bankruptcy trustee is one of many court officials a client will meet as he or she navigates through the bankruptcy process. There are 3 primary types of bankruptcy trustees a client may meet in connection with his or her personal bankruptcy case: 1.) the Chapter 7 Trustee; 2.) the Chapter 13 Trustee; and 3.) the United States Trustee.

The Chapter 7 Trustee is an individual person that all clients who are filing a Chapter 7 bankruptcy case will meet at the 341 hearing, which normally occurs 20-40 days after the filing of the client’s bankruptcy case. The Chapter 7 Trustee has several duties, which include, among other things: 1.) preserving the value of the estate and maximizing the amount of money given to unsecured creditors; 2.) ascertaining whether or not the debtor has hidden assets or committed other types of bankruptcy fraud; 3.) recovering monies that were improperly transferred out of the bankruptcy estate prior to filing (such as preferences or fraudulent transfers); and 4.) distributing any non-exempt assets that exist to pay creditors, if any exist at all. In a Chapter 7 bankruptcy case, the trustee will attempt to determine from the debtor’s statements and schedules, as well as any other information provided or that the trustee can find, what exempt property the debtor gets to keep through the bankruptcy case, and correspondingly, what non-exempt property the debtor must give up to pay creditors (if any). While most Chapter 7 clients do not have any non-exempt assets and get to keep all of their property through the bankruptcy case, some clients that have substantial assets might need to give up some of those assets to pay creditors, and it is the Chapter 7 Trustee’s job to liquidate these non-exempt assets and pay creditors the proceeds to the extent required by law. Many of the exemption rules regarding what property can be kept by the client through the bankruptcy case and what property must be abandoned are very complex, and the assistance of competent counsel is highly recommended to ensure that the maximum amount of client property is protected. If you have questions regarding what property of yours might be exempt in a bankruptcy proceeding, feel free to contact a Nova Law Group attorney and we will be happy to assist you.

The Chapter 13 Trustee is an individual person that all clients who are filing a Chapter 13 bankruptcy case will meet, both at the 341 hearing scheduled 20-50 days after the filing of the client’s bankruptcy case and also at other relevant court hearings regarding plan confirmation. The Chapter 13 Trustee has several duties, which generally include: 1.) ascertaining the value of the client’s exempt and non-exempt property, even though the Chapter 13 Trustee will not liquidate that property; 2.) ascertaining whether or not the debtor has committed any kind of bankruptcy fraud or transferred assets pre-bankruptcy that are disallowed; 3.) distributing available assets to creditors in connection with the payments that are proposed in the client’s bankruptcy plan; 4.) ensuring that the client’s bankruptcy plan pays creditors the proper amounts required by the bankruptcy code; and 5.) ensuring that the client is eligible for Chapter 13 bankruptcy and has secured and unsecured debt below the Chapter 13 debt limits. It is important to note that it is not the Chapter 13 Trustee’s duty to liquidate non-exempt assets and distribute them to creditors, unlike the Chapter 7 Trustee, because in Chapter 13 bankruptcy the client is able to retain even non-exempt property as long as the debtor pays equal value to creditors over the duration of the bankruptcy plan. This is one major advantage of Chapter 13 bankruptcy over Chapter 7 bankruptcy for any client with substantial non-exempt funds, as Chapter 13 allows the client to retain the property anyway by paying creditors an equivalent amount over the next 3-5 years of the Chapter 13 bankruptcy case. If you are in a situation where you think you might have substantial non-exempt assets were you to file bankruptcy, or are considering Chapter 13 bankruptcy for other reasons, feel free to contact a Nova Law Group attorney and we would be happy to service your needs.

The United States Trustee is a branch of the United States Government, closely intertwined with the Department of Justice, which has two primary duties that are performed in both Chapter 7 and Chapter 13 bankruptcy cases. These two duties are: 1.) investigate bankruptcy fraud and other misconduct by both debtors and creditors; and 2.) in Chapter 7 bankruptcy cases, determine whether any client obtaining a Chapter 7 discharge, as opposed to a Chapter 13 discharge, would constitute an abuse of bankruptcy process [11 U.S.C. §§ 707(b)(2), 707(b)(3)]. The first duty of the United States Trustee, to investigate bankruptcy fraud and other misconduct, can take many forms. The United States Trustee, for example, might look into whether or not the client has not reported any assets or liabilities on the bankruptcy statements or schedules, has not reported all of his or her income, has transferred or otherwise hidden assets from the trustee, or has lied about his or her eligibility for bankruptcy. The United States Trustee has very broad powers to look into the financial affairs of any bankruptcy debtor, and in many cases, can subpoena financial records and other documents to uncover bankruptcy fraud or misconduct. However, as long as the client is entirely truthful in all dealings with the court and with the Chapter 7 or Chapter 13 Trustees, the client will never have a problem with the United States Trustee. The one exception to the above has to do with the U.S. Trustee’s second duty, which is to investigate whether or not the use of Chapter 7 bankruptcy by a client would be an abuse of bankruptcy process, and whether that client should be forced to obtain a discharge only in Chapter 13 (or Chapter 11 in rare cases). This duty, a part of which is called evaluating the “Means Test” under 11 U.S.C. § 707(b)(2), is a method the U.S. Trustee uses to determine whether a client could actually pay back a portion of his or her debt in Chapter 13 bankruptcy, and therefore, should not be allowed to file a Chapter 7 bankruptcy. Additionally, the United States Trustee is entitled to make an equitable argument under 11 U.S.C. §707(b)(3) claiming that the debtor’s use of Chapter 7 bankruptcy is “unfair,” and constitutes an abuse of bankruptcy process, the argument being that the debtor can actually afford to pay off his or her debts. It is the experience of Nova Law Group that the United States Trustee generally only objects when the Trustee perceives that the client can actually afford to pay back a portion of his or her debts over time, and due to the overwhelming debt that most clients face going into bankruptcy, these objections are rare. Nevertheless, it is very important to seek competent legal advice in evaluating the “Means Test” and the exceptions to the “Means Test,” as there are many sections of the law regarding this matter that can be effectively raised by competent counsel and sometimes qualify even a high-income debtor for Chapter 7 bankruptcy, even where some amateur practitioners or non-lawyers wouldn’t think it possible. Nova Law Group has extensive experience advising clients regarding the Means Test and similar matters, as well as experience actively litigating such matters with the United States Trustee. If you have questions regarding whether or not you can pass the Means Test or qualify for Chapter 7 bankruptcy, feel free to contact a Nova Law Group attorney and we will be pleased to assist you.