If you have heard of trusts, then you’ve heard of trustees. The role of a trustee in a trust is act as a fiduciary to the trust’s beneficiary, and to manage the trust in their best interest. In a bankruptcy case, the bankruptcy trustee has a similar task – only their fiduciary duty is to the debtor’s creditors, and the account that they are overseeing is the bankruptcy estate, which are all the properties and assets belonging to a debtor that are eligible for liquidation during the bankruptcy process.
Bankruptcy trustees play an important role as an independent third party between the bankruptcy court and the debtor. They are not affiliated with the debtor, nor with the court. Instead, they are affiliated with the United States Trustee Office, a component of the Department of Justice.
Unlike in a trust, your bankruptcy trustee is unlikely to be a close friend or relative. There are certain circumstances within which the creditors in a bankruptcy case can name a trustee, but never the debtor. Any trustee appointed by the Trustee Program must be accepted by the bankruptcy court.
What Does a Bankruptcy Trustee Do?
A trustee’s job is to oversee the bankruptcy and ensure that things go smoothly. While they do act in the creditors’ interests, it is important to note that they are first and foremost agents of the Department of Justice. Their role is to be a watchdog against fraud, and any other potential unsavory activity.
The exact role and responsibilities of a bankruptcy trustee depend on the kind of bankruptcy they have been chosen to help manage and review. To best understand what these trustees are obligated to achieve, it’s important to first understand how different types of bankruptcies function here in the United States.
Bankruptcies and Bankruptcy Estates
Bankruptcies are declared whenever a private entity, whether a person or a business, must declare itself as legally unable to pay an outstanding debt. Different types of bankruptcies exist for individuals and businesses alike, with the four most common ones being:
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- Chapter 7 – Liquidation
- Chapter 13 – Repayment
- Chapter 11 – Restructuring
- Chapter 12 – Family Farmers and Fishermen
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There are others, specifically Chapter 15 (foreign cases) and Chapter 9 (municipalities), but they are rarely relevant and will not be discussed here. When a person or company decides to declare bankruptcy, they must file for bankruptcy (from one of these six types of bankruptcies above). Their lawyers will typically help them draft up the paperwork, and once all the relevant information is brought to court, a bankruptcy case begins.
A trustee is then appointed to the case’s estate, wherein all available assets and properties are reviewed and handled according to the type of bankruptcy that is currently being filed. The trustee will also sit in on the 341 meeting, which is a meeting typically between the debtor and the creditors to ensure that all paperwork is in order. It is essentially a trustee’s job to ensure that everything follows the letter of the law, although the power to have any final say on a bankruptcy remains entirely within the hands of the court.
Chapter 7 Bankruptcy
Chapter 7 bankruptcies are most common among individuals, and involve the total liquidation of all non-exempt assets. Exemption rules differ from state to state, so do not expect any of your assets to be automatically exempt. It is important to speak to your bankruptcy lawyer about what you can and cannot keep if you decide to file for a Chapter 7 bankruptcy. Generally exempted assets include:
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- A portion of the equity of your primary residence.
- Furnishings and household goods.
- A set amount of jewelry.
- A low-equity vehicle, or a portion of the equity of your vehicle.
- Anything that you need to make a living (i.e. tools of the trade).
- Tax-exempt retirement plans.
- Anything held within an irrevocable asset protection trust.
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Anything generally not included in that list counts as a non-exempt asset, including vehicles with equity, valuable collectibles, investments, artwork, musical instruments (if they are non-essential to business), jewelry, any property and assets that are not the debtor’s primary home, and more.
Chapter 13 Bankruptcy
Chapter 13 bankruptcies center around helping an individual or a company structure an agreed-upon repayment plan wherein the debtor has the chance of paying the debt off month for month. The benefits of a Chapter 13 bankruptcy are that the debtor is not required to liquidate any assets, non-exempt assets included.
On the flipside, they are required to make monthly payments to the Chapter 13 trustee for a period of three to five years. To be eligible for a Chapter 13 bankruptcy, an individual must generally be able to repay at least the value of their current non-exempt assets over the course of the bankruptcy proceedings.
It is the trustee’s duty to ensure that the debtor makes these payments, and that the payments are duly distributed to the all relevant and eligible creditors. After the payment period is over, any relevant outstanding debt (such as credit card debt and medical bills) is canceled. There are benefits to a Chapter 13 bankruptcy that are not relevant in Chapter 7 bankruptcy cases, with the caveat that this type of bankruptcy takes years to resolve.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is regarded as the most complex of bankruptcies, and is typically only reserved for large firms and companies that desperately need to continue operating. Some individuals may file for a Chapter 11 bankruptcy if they are ineligible for a Chapter 7 or Chapter 13 bankruptcy, but that is a rare occurrence.
It is an expensive form of bankruptcy, and involves restructuring a company and cooperating closely with both the court and the Chapter 11 bankruptcy trustee to ensure that debts are renegotiated and paid partially or in full. If a large corporation has legally racked up a lot of debt, filing for Chapter 11 bankruptcy would allow them to continue operating while under the scrutiny of the government, until their creditors are repaid.
If fraud or gross incompetence is involved, an appointed trustee will be put in charge of the company temporarily, and it will be the trustee’s job to manage the company until the bankruptcy is resolved. While filing for a Chapter 11 bankruptcy signals incompetence, a trustee is not automatically put in charge as it may often be better for a company’s original managerial team to remain in charge to properly implement reorganization, given the complexities of a Chapter 11 bankruptcy and the need for immense familiarity with a company.
Chapter 12 Bankruptcy
A Chapter 12 bankruptcy is uniquely available for farmers and fishermen, giving them the opportunity to pay their debts without liquidating assets that are central to their livelihood, such as their land and certain equipment.
A Chapter 12 bankruptcy is a Chapter 13 bankruptcy, but with the added caveat that certain barriers of entry are removed specifically for family farmers and family fishermen. Trustees in charge of a Chapter 12 bankruptcy work with the debtor and the creditors to ensure that all of the debtor’s disposable income goes to the creditors for three to five years.
Under a Chapter 12 bankruptcy, those who apply must be:
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- Engaged in a commercial fishing or farming operation.
- Total debts must not exceed a set amount.
- At least 50 percent of the gross income of the individual/family for the preceding tax year (as well as the second and third prior tax years, for farmers) must have come from farming/fishing.
- And at least 50% (if a farmer) or 80% (if a fisherman) of the total debt must be related to farming/fishing.
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In short, a trustee’s job in any bankruptcy is to delegate the repayment of a debt, or the liquidation of a debtor’s assets, and the proper distribution of the payments/assets to the relevant creditors.