What Is a Bankruptcy Trustee?

One of the key people in most bankruptcies is the bankruptcy trustee. The trustee’s duty is to manage the process and distribute the property of the person or business in bankruptcy. This article looks at the role and duties of the trustee during the bankruptcy process, depending on the bankruptcy type. 

What Is a Bankruptcy Trustee? 

A trustee is someone who has administrative control of property (like business assets) in trust. The trustee has a fiduciary duty to administer the property impartially for a person or business. A bankruptcy trustee is a special kind of trustee who oversees a bankruptcy case. 

The DOJ’s U.S. Trustee Program selects bankruptcy trustees, who are private individuals with skills in business, accounting, management, and legal issues relating to bankruptcy. The Trustee program calls a bankruptcy trustee the “watchdog over the bankruptcy process.” 

When someone files a bankruptcy case, if a trustee is needed, the Trustee Program appoints one to manage the case and the assets, depending on the type of bankruptcy. The trustee monitors the actions of the bankruptcy parties and makes sure the process is run in compliance with applicable laws and the bankruptcy plan. 

The trustee is paid a fee for administering the bankruptcy. In addition, the trustee may be paid for reasonable expenses and also for compensation for their services, based on the bankruptcy type. In Chapter 7 or 11 bankruptcy, for example, the trustee is paid a commission on a percentage of the money disbursed to holders of secured claims and others. 

Types of Bankruptcy Trustees

Here’s how bankruptcy trustees work in different types of bankruptcies: 

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 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. 

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 Subchapter 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.  

What Does a Bankruptcy Trustee Do? 

To see how the standard bankruptcy process works, take this example for Chapter 7. A typical case begins with the debtor filing a petition and giving the bankruptcy court information about assets and liabilities, current income and expenditures, and contracts and leases it is currently liable for. The court, in turn, assigns a trustee, who receives all the information about the case.  

The trustee then takes the following steps: 

1. Collects and reduces to money the assets of the business
2. Investigates the debtor’s financial affairs
3. Examines the proofs of claims of creditors (those the debtor owes money to) 
4. Distributes the money to creditors, according to a specific order
5. Approves or opposes the discharge of specific debts (allowing the debtor to avoid repaying them)   
6. Makes periodic and final reports to various government agencies, including tax reports

Trustees and Adversary Proceedings

Bankruptcy trustees are able to file adversary proceedings (AP) lawsuits separate from but related to a bankruptcy case; it’s similar to a lawsuit in other courts. An AP can be filed to recover money or property, to determine the validity of a lien or other property interest, to determine whether a debt is dischargeable, to remove a creditor’s claim, or other similar actions. 

The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.