Bankruptcy Trustee: Meaning, Overview, Example

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.

Understanding the Role of a Bankruptcy Trustee

A trustee's role differs according to the type of bankruptcy proceeding that they are overseeing.

In a Chapter 7 bankruptcy proceeding, the primary action is a liquidation of assets. The trustee will manage the sale of the assets and then oversee the distribution of the proceeds to creditors.

In a Chapter 11 proceeding, the trustee, if appointed, may work with the debtor, usually a business, that hopes to emerge from bankruptcy and continue operating.

Another type of bankruptcy is Chapter 13. In such cases, the trustee works with individuals who seek to keep some of their assets in return for repaying certain debts.

Chapter 7

Chapter 7 of Title 11 of the U.S. bankruptcy code controls the process of asset liquidation. The appointed trustee will collect and take control of a debtor's non-exempt assets, liquidate them, and distribute the proceeds to creditors.

Debtors may not remove assets that belong to the bankruptcy estate without notice from the trustee or permission from the court. After the exhaustion of proceeds from the liquidation, the trustee and court may discharge the remaining debt.

There are eligibility requirements for filing a Chapter 7 bankruptcy. A debtor must not have had a Chapter 7 bankruptcy discharged in the preceding 180 days, and the applicant must pass a means test. The Chapter 7 process is also known as a straight or liquidation bankruptcy.

Chapter 11

Chapter 11 of the U.S. bankruptcy code is a form of bankruptcy that involves a reorganization of a debtor's business affairs, debts, and assets. Businesses generally are the entities that file for this type of bankruptcy. Chapter 11 gives a debtor a fresh start, subject to the fulfillment of their obligations under the reorganization plan.

Chapter 11 typically doesn't involve a bankruptcy trustee. However, if one is appointed by the court, they take and maintain control over the debtor's affairs and bankruptcy estate property during the reorganization being carried out by the debtor. In addition, the trustee may decide to create a creditor’s committee to work with the debtor to form the reorganization plan.

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

Chapter 13

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

The bankruptcy trustee's role here is to collect the payments, distribute the funds to creditors, and request that payment amounts be increased, if need be. The trustee may arrange and run an initial meeting between the debtor and the creditors.

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.

Example of a Chapter 11 Bankruptcy Trustee

In June 2022, beauty industry pioneer Revlon, which got its start selling nail polish in 1932 and which had operated for close to 100 years, filed for Chapter 11 bankruptcy.

The company had amassed over $3.5 billion in debt. Sales and revenue had been dropping for several years due to a growing lack of relevancy for consumers, competition from direct-to-consumer outfits, and inflation. It also suffered from the supply chain complications associated with the pandemic and a Citigroup error that mistakenly wired close to $1 billion in company funds to creditors. Consequently, its cash flow challenges made it impossible for it to continue operating.

On April 3, 2023, Revlon received court approval for its reorganization plan, over the objections of the United States Trustee that the plan did not provide creditors with an informed choice regarding releasing non-debtor third party claims.

The company announced that it had restructured its debt and increased its liquidity by more than $285 million. It would emerge from Chapter 11 to resume operations by the end of the month as a private company, not the previous publicly-traded company.

The Bottom Line

A bankruptcy trustee is an individual appointed by the U.S. Trustee to administer a bankruptcy case. Their specific responsibilities will depend on the type of bankruptcy case to which they're assigned. In general, and according to the U.S. Trustee Program, a bankruptcy trustee is the watchdog that oversees the integrity of the entire bankruptcy process.