What is a Bankruptcy Trustee?

A bankruptcy trustee is a person appointed by the United States Trustee, an officer of the Department of Justice, to represent the debtor's estate in a bankruptcy proceeding. Bankruptcy trustees evaluate and make recommendations about various debtor demands in accordance with the U.S. Bankruptcy Code.

However, a bankruptcy judge has the ultimate authority on the distribution of assets. A bankruptcy trustee works with the bankruptcy court to take any action. The trustee cannot act without approval by the court.

Key Takeaways

  • A bankruptcy trustee is an administrator who is assigned to your case by the United States Trustee if you file for bankruptcy.
  • There are three main types of bankruptcy–Chapter 7, Chapter 11, and Chapter 13; the trustee's responsibilities vary depending on which type has been filed.
  • With Chapter 7, the trustee oversees the liquidation of the assets and the paying back of the creditors.
  • With Chapter 11 bankruptcy, a trustee helps reorganize a debtor's business obligations, debts, and assets; this usually applies to a corporation.
  • With Chapter 13 bankruptcy, a trustee helps an individual looking to keep some assets by repaying their debt over time on a payment plan.

Bankruptcy Trustee Responsibilities

Responsibilities of the trustee differ based on the type of bankruptcy proceeding they are attending. In a Chapter 7 bankruptcy proceeding, the action is essentially a liquidation. The trustee will manage the sale of the assets and then oversee the distribution of the proceeds to creditors.

With a Chapter 11 proceeding, the debtor hopes to emerge from bankruptcy and continue operation.

Another type of bankruptcy is Chapter 13. Under this bankruptcy, the individuals wish to keep some of their assets in return for repaying certain debts.

755,182

The number of total bankruptcy filings in 2018, according to the American Bankruptcy Institute; the figure is down two percent from 2017, and represents a decline for the ninth year in a row–since the economy began its recovery after the Great Recession.

What is Chapter 7?

Chapter 7 of Title 11 of the U.S. bankruptcy code, controls the process of asset liquidation. An appointed trustee will liquidate nonexempt assets to pay creditors. After the exhaustion of proceeds from the liquidation, the trustee and court discharge the remaining debt.

There are eligibility requirements to file a Chapter 7 bankruptcy, such as the debtor must have had no Chapter 7 bankruptcy discharged in the preceding eight years and the applicant must pass a means test. The Chapter 7 process is also known as a straight or liquidation bankruptcy.

Defining Chapter 11

Chapter 11 is a form of bankruptcy which involves a reorganization of a debtor's business affairs, debts, and assets. Named after the U.S. bankruptcy code 11, corporations generally are the entities who file for Chapter 11 since this proceeding allows a greater length of time. Corporations require time for debt restructuring, and it gives the debtor a fresh start, subject to the debtor's fulfillment of his obligations under the plan of reorganization.

As the most complex of all bankruptcy cases and generally the most expensive, a company would consider Chapter 11 reorganization only after careful analysis and exploration of all other alternatives.

Chapter 13 and Restructuring Debts

Chapter 13 bankruptcy enables individuals with a regular income to restructure their obligations to repay their debt over time. In such a plan, the debtor does not seek to earn general forgiveness of their outstanding debts. Rather, the debtor offers up a repayment plan that employs fixed installment payments.

Chapter 13 bankruptcy formerly was called a wage earner's plan because relief under it was only available to individuals who earned a regular wage. Subsequent statute changes expanded it to include any individual, including the self-employed and those operating an unincorporated business.

Both personal and corporate bankruptcy filings fell in 2018 to the lowest level in more than ten years, since the Great Recession, according to a report from Supreme Court Chief Justice John Roberts.

Real World Example of a Chapter 7 Bankruptcy Trustee

During the 2019 bankruptcy proceedings of Billy McFarland's Fyre Festival, the bankruptcy trustee asked the presiding judge to issue subpoenas to several talent agencies. The 2017 Fyre Festival was to have been a stellar, star-studded, event at the Grand Exuma in the Bahamas. However, when ticket-holders arrived, they found a site still under construction.

The festival went into involuntary Chapter 7 bankruptcy for the more than US$26 million dollar bomb. The trustee wished to examine nearly US$1.4 million in wire transfers to secure the advertised talent.

A bankruptcy trustee in a Chapter 7 case may be responsible for managing payments made by the debtor for a specific period. The trustee will forward payments to the creditor for a specified period, usually three-to-five years.