After a person files a bankruptcy petition, they will be assigned a date for their “Meeting of Creditors,” also known as the 341 Meeting. Although bankruptcy debtors will not actually meet with their creditors in person during these meetings, this rule calls for a meeting between the trustee of a bankruptcy case and the debtor, and allows any creditor with questions pertaining to the bankruptcy case to participate. But, outside of the 341 Meeting, what is the role of the trustee?
While a trustee may have specific duties, the bankruptcy trustee is put in place for two main purposes: 1. To administer the debtor’s assets and 2. To investigate the financial affairs of a debtor. While this does not explicitly create an adversarial relationship between the debtor and the trustee, it is important to remember exactly what the purpose, and the powers, of a trustee are in bankruptcy. In all cases, the bankruptcy trustee is a fiduciary and representative of the bankruptcy estate, which is created upon the filing of a bankruptcy case. This estate consists of virtually all assets of the debtor as of the date the case was filed. It is the trustee’s duty to maximize the assets available to the estate for the distribution to the creditors.
CHAPTER 7 BANKRUPTCY TRUSTEE
A Chapter 7 bankruptcy trustee’s primary role is to ensure the Bankruptcy Code is being followed. The trustee ensures that a debtor properly discloses all assets, and decides whether a discharge would be proper depending on the circumstances. These circumstances can include anything, from the assets currently available to the debtor and the estate, to the assets expected to be inherited or collected by the debtor in the near future. The trustee determines whether the exemptions claimed by the debtor are correctly applied, and liquidates the assets that are not claimed as exempt.
In summary, the trustee in a chapter 7 case confirms the debtor actually listed all assets and debts, double-checks all the exemptions are correctly applied, and liquidates, or sells, anything that is not exempt property. From there, the trustee distributes the funds to the creditors.
CHAPTER 13 BANKRUPTCY TRUSTEE
When an individual files for a Chapter 13 bankruptcy, the court appoints a trustee for the sole purpose of administering the case. The Chapter 13 trustee evaluates the case, in a similar fashion to a Chapter 7 trustee, and serves as the disbursing agent. This means that the trustee confirms all the assets of the debtor are included in the case, and the debtor then makes payments based on those assets and their income to the trustee, who in turn disburses the payments amongst the creditors in the case.
The purpose of a Chapter 13 is for the debtor to put forward a plan, following the rules established by the bankruptcy laws, to repay all creditors over a period of time, usually from future income. This gives the debtor the opportunity to catch up on payments through the bankruptcy, without needing to pay each debt back in full. To participate in a Chapter 13 as a creditor, and receive distributions from the debtor, creditors must file written proofs of claim within the court deadlines. The trustee’s main purpose here is to actually make the distributions to the creditors from the amount paid by the debtor.
CHAPTER 11 BANKRUPTCY TRUSTEE
A Chapter 11 bankruptcy trustee has a slightly different role than in the other chapters. The purpose of a Chapter 11 is to reorganize a business. Because the business is reorganizing, this often means the company can continue to operate during the course of the bankruptcy. The Chapter 11 debtor, often the debtor-in-possession, is required to submit monthly reports to the trustee to provide information about the operations of the debtor. The debtor is also required to pay fees to be submitted to the trustee.
While this may seem similar to a Chapter 13 trustee’s duties, the Chapter 11 trustee has much broader duties, including receiving the monthly operating reports, to ensure that the debtor is actually making some progress in its payments. Should the trustee not see progress being made, the trustee will in turn convert the case to a chapter 7 and liquidate the company, rather than allowing payments to continue where reorganization would fail.
THE POWERS OF THE TRUSTEE
While the trustee may seem to be a party for debtors to fear in a bankruptcy, their primary purpose is to protect the assets of the estate. In addition to the responsibility to sell a debtor’s non-exempt property in a chapter 7, the most significant powers of the trustee include those to avoid or abandon the property of the estate.
Avoidance
Perhaps the most feared power the trustee holds is the power to avoid transfers made by the debtor prior to the filing of the bankruptcy. The trustee may seek a court order through litigation to avoid transfers of property, even if the debtor consented to these transfers. This includes the sale of certain property, agreements for security interests in real property, and even the transfer of real property. The trustee’s duty is to investigate these transfers and determine if the estate would be best served through avoiding them.
The avoidance power of the trustee is applicable both to preferential transfers, meaning those which occur while the debtor is insolvent and made 90 days prior to the bankruptcy, and fraudulent transfers, where the debtor either defrauded creditors or simply did not receive reasonably equivalent value for the property transferred. Either way, the trustee’s powers to avoid can often lead to a seemingly innocent transaction being reversed.
Abandonment
The trustee may abandon property which is burdensome or of inconsequential value to the bankruptcy estate. Primarily, this comes into play where real estate is encumbered by enough liens on the property to prevent any equity being held in the property. Lenders would often welcome abandonment in these cases, as the secured creditor would then be allowed to sell the collateral to recover repayment on the loan.
Conversion
The final and arguably most power tool the trustee holds is that of conversion. While it rarely happens, a debtor can voluntarily convert to a Chapter 7 to liquidate instead of the originally filed Chapter 11 or Chapter 13. What happens more often, however, is a trustee finds the debtor to have not acted in good faith, or an effort to pay creditors less than the amounts they are entitled. In these cases, the trustee will file a motion to convert the case and, unless the debtor can show why they are entitled to staying within the chapter they filed, the court will often either dismiss or convert the case.
If you are considering filing for bankruptcy, it is important to contact an experienced New Jersey bankruptcy attorney to guide you through your options and present you with potential pitfalls. For questions regarding a potential bankruptcy, call the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.
