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Who is a bankruptcy trustee?

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The Baner Law Firm

Which trustee are we talking about? There are actually two trustees involved in bankruptcy cases: the U. S. Trustee and the bankruptcy case trustee (sometimes called the “panel trustee”).

The Office of the United State Trustee is a division of the U.S. Department of Justice. The U.S. Trustee is charged with several tasks, including overall supervision of the bankruptcy system, appointment of case trustees, and review of individual bankruptcy cases. The U.S. Trustee will impact a bankruptcy case, but it is not what most people think of as the “bankruptcy trustee.”

When most people use the term “bankruptcy trustee”, they are usually referring to the “case trustee” or “panel trustee”, not the U.S. Trustee. The bankruptcy trustee is appointed by the U.S. Trustee to serve as the administrator for a particular bankruptcy case. Often, the U.S. Trustee appoints a panel of trustees to serve a particular geographic area (which leads to the moniker of “panel trustee”).

The Bankruptcy Trustee Administers the Assets of the Bankruptcy Estate

When you file for bankruptcy protection, a bankruptcy trustee is usually appointed. The bankruptcy trustee is often an attorney with experience in bankruptcy law.

Appointment of a trustee is automatic is Chapter 7, Chapter 12 and Chapter 13 cases. In Chapter 11, the debtor usually fulfills the role of the trustee by acting as a “debtor-in-possession”, except in rare cases where a case trustee is appointed by the Court.

Administration of Estate Property

Another major trustee duty is to “administer” the property of the bankruptcy estate. What happens when the bankruptcy trustee administers your assets depends on what type of bankruptcy you file. The Chapter 7 bankruptcy trustee’s role is very different from the role of a bankruptcy trustee in Chapter 11, 12 or 13.

Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, the bankruptcy trustee’s administration of your assets involves collecting and liquidating your non-exempt assets for the maximum benefit of your unsecured creditors. If the trustee locates non-exempt assets, the trustee sells those assets at the highest price. The highest price might be obtained by selling the assets at a public or private auction, or by “selling” the assets back to you (when you make a cash offer to the trustee to retain the non-exempt assets).

When your assets are partially exempt, the trustee can sell the assets and pay you the exempt portion of the sale proceeds. For example, if you have an asset that could be sold for $10,000, but your exemption protection is only for $3,000, then the trustee could sell that asset, pay you $3,000, and use retain the remaining balance of $7,000.

Also, when your assets are jointly-owned, the trustee can liquidate the entire asset to obtain your share of the asset. For example, if you share equal ownership of an asset with a family member that is worth $10,000, the trustee could sell the entire asset, give half of the sale proceeds to your family member, and retain your half of the sale proceeds.

If one of your assets is subject to a valid lien or security interest, the trustee takes control of that asset with the lien. For example, if your car is valued at $10,000, but your car is subject to a $10,000 title loan, the trustee cannot liquidate your car without paying of the balance of the loan and therefore usually will not do so. However, if your car is subject to a $2,000 loan, then the trustee could sell the car, pay off the loan, and retain the remaining sale proceeds. It is also worth noting that some liens are not valid and may be avoided or disregarded by the bankruptcy trustee.

As a practical matter, most Chapter 7 bankruptcy cases end up being declared “no asset” cases. That means all of the assets are protected by exemptions or are too cumbersome to liquidate. The result is there are no non-exempt assets for the trustee to liquidate, and you get to keep all of your assets.

The Chapter 7 bankruptcy trustee is paid a small, flat fee for each case they handle. However, the trustee also receives a commission based on a percentage of the value of the assets liquidated in a case. This gives the Chapter 7 bankruptcy trustee incentive to liquidate as many assets as legally allowed.

In Chapter 12 Bankruptcy & Chapter 13 Bankruptcy

In Chapter 12 and Chapter 13 bankruptcies, the bankruptcy trustee’s administration involves reviewing your proposed bankruptcy plan for compliance with the bankruptcy laws. If the trustee detects problems with the plan, the trustee may formally object to the plan.

If the plan is confirmed by the bankruptcy judge, the bankruptcy trustee becomes responsible for collecting the payments required by the plan from you and distributing those funds to your creditors pursuant to the confirmed plan.

The Chapter 12 and Chapter 13 bankruptcy trustee collects a commission that is based on the percentage of the funds you pay through the plan.

How is a Bankruptcy Trustee compensated?

* This information is intended to give you a general overview of the role of the Trustee in the bankruptcy process.  However, this information is not exhaustive.  If you have specific questions about the bankruptcy trustee and the role the trustee may play in your bankruptcy proceeding, please feel free to schedule an appointment

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