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 a 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 assets and the paying back of 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.

Understanding Bankruptcy Trustee Responsibilities

A trustee's responsibilities 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, usually a business owner, hopes to emerge from bankruptcy and continue operation.

Another type of bankruptcy is Chapter 13. Individuals who undergo this bankruptcy wish to keep some of their assets in return for repaying certain debts.

774,940

The total number of bankruptcy filings in 2019, which represents a slight increase over 2018, according to the American Bankruptcy Institute.

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. A debtor must not have had a Chapter 7 bankruptcy discharged in the preceding eight years, for example, 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 that file for Chapter 11 since this proceeding allows for more time (corporations require time for debt restructuring). Chapter 11 gives a debtor a fresh start, subject to the fulfillment of their obligations under the reorganization plan.

As Chapter 11 is the most complex of all bankruptcy cases and generally the most expensive, a company would consider 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.

Consumer bankruptcy filings are expected to rise over time due to the effects of COVID-19.

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 star-studded event on the island of Great 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 more than $14 million. The trustee intended to examine more than $1.7 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.