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Who Is a Bankruptcy Trustee?

A bankruptcy trustee is often the most important person in your bankruptcy case.

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A trustee in bankruptcy has many different duties to perform. Although most people have heard of a trustee of a trust, they have not heard of the bankruptcy trustee. Bankruptcy trustees are essential to the operation and integrity of the bankruptcy system.

The Office of the United States Trustee

The United States Trustee is a federal office supervised by the United States Department of Justice. The U.S. Trustee is divided into 21 regions based in various areas throughout the United States. The U.S. Trustee was established in 1978 to be the watchdog in bankruptcy, guarding against bankruptcy fraud, among other tasks. However, the U.S. Trustee is not the same thing that is colloquially known as a “bankruptcy trustee.”

Panel Trustee

The U.S. Trustee program maintains a list of private individuals, often lawyers or accountants that act as bankruptcy trustees in Chapter 7 bankruptcies. Upon the filing of a Chapter 7 case, a random bankruptcy trustee is chosen to ensure fairness and to prevent debtors from choosing a favorable trustee. These trustees are sometimes called panel trustees and are the individuals that are commonly called “bankruptcy trustees.”

Panel Trustee Duties

The panel trustee or bankruptcy trustee essentially administers a Chapter 7 bankruptcy case. The trustee reviews the bankruptcy petition and documents filed by a debtor for accuracy and to detect any possible fraud. A further important duty of the bankruptcy trustee is to collect any non-exempt assets of the debtor for distribution to creditors. A portion of these tasks are done at the Meeting of Creditors, when the bankruptcy debtor must meet with the trustee and answer questions under oath.

Collection of Assets and Distribution

Although in many bankruptcy cases the bankruptcy trustee will find no assets to distribute, if non-exempt assets exist, a trustee must collect those assets. The assets are then sold at the highest price. The cash received is then paid to creditors in a certain priority as established by the Bankruptcy Code.

Fraudulent and Preferential Transfers

The bankruptcy trustee also has the ability to file a lawsuit in bankruptcy, called an adversary proceeding, to seek the return of transfers of money or property by the debtor. These transfers are called fraudulent transfers, where the debtor transfers money or property to hide it from creditors. These transfers are called preferences if the debtor pays a substantial amount of money or property soon before the bankruptcy to a particular creditor (usually a friend or family member). If successful, the bankruptcy trustee can take back the money or property.

Compensation

A bankruptcy trustee is paid a small fee for each case that they take on. However, the Bankruptcy Code gives trustees a further incentive to find assets. A trustee is given a percentage commission on any assets obtained from the debtor.

Chapter 13 and Chapter 11 Trustees

Because Chapter 7 bankruptcies are much more common than Chapter 11 and 13 bankruptcies, many more trustees are needed for Chapter 7 cases. Furthermore, Chapter 11 and 13 cases can be much more complex. As a result, many judicial districts have one to several trustees that serve as Chapter 11 or 13 trustees. These trustees are also commonly referred to as “bankruptcy trustees.”

How Does a Trustee Affect Your Bankruptcy Case?

If it is not obvious from the above, a bankruptcy trustee can cause your bankruptcy case to wrap up quickly and without event or result in your case dragging on for a lengthy period of time. The course of your bankruptcy case is somewhat outside of your control, but is essential to fully cooperate with the bankruptcy trustee in every aspect. Most importantly, you must provide all of the information that they request.

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