WHAT IS A BANKRUPTCY TRUSTEE ?
What Does a Bankruptcy Trustee Do?
A Bankruptcy Trustee is an impartial, private individual or firm appointed to oversee a bankruptcy case, playing a fundamental role in ensuring the integrity of the bankruptcy system and balancing the interests of the debtor and creditors. They are a vital administrative figure, and their duties and compensation vary significantly based on the chapter of the U.S. Bankruptcy Code under which a case is filed.In most of the United States (48 states), the
However, the federal judicial districts in North Carolina and Alabama operate under a separate system utilizing Bankruptcy Administrators.
- Role: Bankruptcy Administrators perform the same general functions as the U.S. Trustee Program—appointing and supervising private trustees and monitoring case administration.
- Administration: The Bankruptcy Administrator program is managed by the Administrative Office of the U.S. Courts (Judicial Branch), unlike the U.S. Trustee Program (Executive Branch/DOJ), a difference that stems from historical legislation. This results in some procedural and fee-structure differences for cases filed in these two states.
Chapter 7 – Liquidation
Chapter 7 liquidation bankruptcy is available to individuals or businesses. Its purpose is to discharge certain debts in order to give the debtor a “fresh start.”
In Chapter 7, the trustee takes over the business property and sells it or turns it into cash to pay creditors. The debtor may be able to keep some personal items and possibly real estate, called “exempt property.”
Chapter 7 trustees are often referred to as “panel trustees,” because they are appointed by the U.S. trustee to a panel and then assigned to the specific bankruptcy
Chapter 11 Reorganization
Chapter 11 is called “reorganization” bankruptcy because it sets up a process for the individual or business to reorganize its debts while continuing to operate. Chapter 11 is used mostly for business bankruptcies
In most cases, no trustee is appointed for a Chapter 11 bankruptcy. The debtor (called a “debtor in possession”) operates the business and performs trustee functions. If the court appoints a trustee, the latter takes control of the debtor’s business and property during the reorganization period. A trustee can appoint a creditor’s committee to consult with the debtor to participate in forming a plan.
Chapter 11 for Small Businesses
Chapter 11 Sub-chapter V bankruptcy is a shorter, streamlined small business bankruptcy process. These cases involve more oversight by the trustee, including an initial interview and monitoring of the activities of the small business debtor. The trustee works with the small business debtor and its creditors to create a reorganization plan they all agree to.
Chapter 13 Repayment Plan
Chapter 13 bankruptcy allows individuals with regular income to keep their property and pay debts based on a repayment plan over three to five years. The court approves the plan and budget, and the trustee acts as a disbursing agent, accepting payments from the debtor and distributing them to creditors based on the repayment plan.
The Chapter 13 bankruptcy process includes a meeting of creditors and the debtor, set up and run by the trustee. Before the meeting, the trustee can consult with the trustee to make sure that the petition and repayment plan are complete and accurate.
Chapter 13 trustees are called “standing trustees” because they have a standing (continuing) appointment to cases within a specific geographic area. In some cases, a Chapter 13 trustee may advise the debtor to take a course in financial management.
Bankruptcy Trustee: Roles and Functions
Understanding the responsibilities of a bankruptcy trustee is crucial to grasp the standard bankruptcy process, especially in the context of Chapter 7. In a typical scenario, the debtor initiates the process by filing a petition with the bankruptcy court, providing essential information about assets, liabilities, income, expenditures, contracts, and leases.
Following this, the court appoints a trustee who assumes control of the case and undertakes the following key tasks:
- Asset Liquidation: The trustee is responsible for collecting and converting the business’s assets into monetary value.
- Financial Investigation: The trustee thoroughly examines the debtor’s financial affairs to gain comprehensive insights.
- Creditor Claims Review: Validity of claims from creditors, those to whom the debtor owes money, are carefully assessed.
- Fair Distribution: The trustee distributes the available funds to creditors following a specific order of priority.
- Debt Discharge: In some cases, the trustee approves or contests the discharge of certain debts, which allows the debtor to be exempted from repaying them.
- Reporting Obligations: The trustee prepares and submits periodic and final reports to relevant government agencies, including tax-related reports.
Furthermore, bankruptcy trustees have the authority to initiate Adversary Proceedings (AP), which are separate lawsuits linked to a bankruptcy case. These proceedings address various matters, such as recovering money or property, validating liens or property interests, determining dischargeability of debts, removing creditor claims, and other related actions.
It’s essential to understand that bankruptcy trustees do not represent the debtor; instead, they operate on behalf of the bankruptcy court. While it is possible to represent oneself at the bankruptcy court, considering the complexity of some cases, it might be beneficial to engage a bankruptcy attorney for representation.
A bankruptcy trustee should be seen as a guiding force throughout the process. Cooperation with the trustee by providing all necessary information, active participation in creditor meetings, and prompt responses to requests can contribute to a smoother and more expeditious case resolution.
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