Bankruptcy 101: The Role of the Trustee

While filing for bankruptcy is made as simple a process as possible for a person whose debt has become unmanageable, things behind the scenes are a little more complex. When a person files for bankruptcy, a debtor’s assets are turned into what is known as a bankruptcy estate, which becomes a separate legal entity from the debtor.

In order to maintain checks and balances, an impartial trustee from the Department of Justice is appointed to oversee that estate, and depending on the complexity of the bankruptcy case, will assume a variety of duties including assessing the validity of paperwork, selling a debtor’s property to pay some creditors and distributing payments to those creditors. Trustees will make recommendations regarding the debtor’s case based on the U.S. Bankruptcy Code, although a judge will make any final decisions. In most cases, judges will distribute assets as seen fit by the trustee, who has a more intimate understanding of the debtor’s financial situation and ability to repay debt.

A trustee’s duties are different depending on the type of bankruptcy filed.

  • In a Chapter 7 filing, the trustee will review paperwork and liquidate any assets that aren’t exempt from liquidation, such as a home or vehicle, then oversee the distribution of those assets to creditors. When assets are exhausted, the remaining debt is discharged by the court, based on advice from the trustee. To be eligible to file for Chapter 7, a debtor must pass a means test, which determines a debtor’s ability to repay his or her debt.
  • Chapter 11 is a restructuring of business debt and allows the business owner to continue to operate during the reorganization process. Chapter 11 is complex, and a trustee becomes responsible for the debtor’s business affairs, which includes filing taxes and managing all other paperwork. The trustee will determine if Chapter 11 is a feasible plan, and if it is not because the overall debt outweighs the potential income, will recommend that the case be converted to a Chapter 7 bankruptcy, with a liquidation rather than a restructuring of the business.
  • In a Chapter 12 bankruptcy, designed exclusively for farmers and commercial fishermen, debt is restructured and an appointed trustee will take control of any disposable income and disperse it to creditors for an extended period of time, which allows the family farm or fishing operation to continue.
  • In a Chapter 13 bankruptcy, a debtor hopes to keep and continue paying for some assets. A trustee will serve as a mediator between debtors and creditors, and will receive payments a debtor makes under a repayment plan – usually set up over three to five years – then distribute those payments to creditors. A trustee will monitor income and expenses as well as tax returns and child support payments, and in many cases, will help debtors establish a budget that allows them to successfully make payments, fulfilling their obligations to creditors.

Trustees are paid a portion of the liquidated proceeds, or a fee if there are no assets available for liquidation.

Are you considering filing for bankruptcy?

If you are struggling financially, bankruptcy could be a viable solution. Find out more about personal or business bankruptcy through a free consultation with the attorneys at Hedtke Law Group, who can help guide you in the right direction. For more information, please call us at 626.502.8405 today.

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