Trustees, Like Judges, are Assigned by the Clerk of Court

It seems that the most mysterious player to a debtor in a Chapter 7 Bankruptcy is the Trustee assigned to the case.  They’re not the judge, nor are they the debtor’s or a particular creditor’s attorney. “So who is this person and what do they want from me?” is a question I have heard more than several times from clients. I will attempt to explain.

When a Chapter 7 Bankruptcy is filed, the Clerk of the Court assigns a Judge and a Trustee to the case. In most cases, the debtor will never have the need to interact with the Judge (this is a good thing). In all cases, the debtor will have a face to face with their Trustee one time (usually only once) for about four or five minutes.

Trustee is Not a Judge

The Trustee is NOT a judge, but they are scrutinizing the debtor and their bankruptcy petition. That’s their job and this is why:

In the process of a Chapter 7 Bankruptcy, nobody is going to take a debtor and shake them by their ankles for every last nickel and leave them naked with a barrel under the highway overpass. The debtor is allowed to keep some stuff to help with their “fresh start.” How much and what stuff the debtor gets to keep depends on which state they call home and how long they have been there (a whole other topic). I explain it to my clients this way: When we file a bankruptcy, we put all of your property, assets, money in the bank, accounts, claims, entitlements, rights, etc. in one big pretend pile and value the pile. We then take out of the pile everything that is covered by exemptions in this State. Is there anything left in our pretend pile? If the answer is “yes,” then whatever is left in the pile is subject to liquidation/administration through a bankruptcy estate. The Chapter 7 Trustee’s job is to determine if there is anything left in that pile and, if there is, to be the manager of that bankruptcy estate for the benefit of the creditors.

The Code requires each debtor to attend a “Meeting of Creditors” about a month or so from the date the petition is filed. At the meeting, the Trustee swears the debtor under oath and asks a series of questions. Some questions are required to be asked by the Bankruptcy Code and the Department of Justice and the others are designed to help the trustee determine if this case is going to need to become an “Asset Case” in need of administration through a bankruptcy estate.

Questions a Trustee Typically Asks and Why

  • “Are you required to pay child support or alimony to someone else?” The first reason I ask this is because the Code requires me to send a letter to anyone on the receiving end of a Domestic Support Obligation (DSO) advising them of their rights when the person who is obligated to pay them files bankruptcy.  The second reason why is that these obligations are sometimes omitted from the petition by the debtor (for various reasons), but if they do owe and an estate is created, the DSO arrearage is first in priority for payment and the Trustee needs to know about it.
  • Have you sold, transferred or given away any property in the last year?” and “Have you repaid any friends or family members any money you owed them in the last year?”  Depending on the circumstances, the Trustee has the legal ability to avoid such transactions and recover value into an estate for the benefit of creditors. Very often this results in the debtor paying into the estate since the alternative is the Trustee suing the third party to recover the value.
  • “Did you pay any of your credit cards or get garnished within the three months before your petition was filed?” These payments, garnishments and levies are usually all recoverable by the Trustee for the benefit of a bankruptcy estate.
  • “Do you have any lawsuits pending or any right to sue someone right now?” A pending claim or the right to bring a pending claim is an asset that can be liquidated by the Trustee for the benefit of creditors.
  • “Have you recently received an inheritance or do you expect to inherit anything?” How an inheritance was spent within various timeframes before a bankruptcy petition was filed may be avoidable by the Trustee and any pending inheritance is an asset that could be used to fund an estate if it cannot be covered by an exemption.

The Trustee is not there to judge a debtor and determine if they are worthy of a discharge, they most certainly are not there to make anyone feel bad or beat them up for getting in the position of being a bankrupt. They are there to make sure everything is above-board and to work with the debtor to liquidate any un-exempted assets into an estate in accordance with the rules we are all given (the Bankruptcy Code). Most of them are pretty nice people who are just doing the job they are required to do.