Whether you file for bankruptcy under Chapter 7 or Chapter 13, a bankruptcy trustee will play a significant role in your case. While the trustee is required to treat a debtor fairly, they will not always act in your best interests and should not be considered your representative in dealing with creditors. The role of a trustee varies somewhat depending on whether a debtor chooses Chapter 7 or Chapter 13, although there are many parallels.
Duties of the Trustee Under Chapter 7
The trustee will carefully examine the information in a debtor’s bankruptcy petition. They will need to verify the calculations and statements that the debtor made by referring to outside sources. Similarly, the trustee will attend the Section 341 meeting of creditors in your case and ask questions about the statements in your bankruptcy paperwork. You will answer these questions under oath, so you must be truthful or risk the dismissal of your case and other serious penalties.
Once a Chapter 7 bankruptcy is underway, the bankruptcy trustee will take over the non-exempt property of the debtor, sell it, and use the proceeds to pay creditors. You should be aware of this process in advance because you may not be able to dismiss a Chapter 7 case on the basis that you did not know that you would lose some of your property. In many cases, however, a debtor has no property that is not covered by an exemption. This means that the trustee will notify creditors that this is a no-asset case and that they should not expect any payments. If the trustee disputes a debtor’s claimed exemption, a judge will determine whether the exemption applies to the extent that the debtor claims.
A trustee also will address problems with security interests and liens that were not properly created. They can get rid of these encumbrances and sell the property without paying off the lien or security interest. If a debtor transferred property or paid a preferred creditor (such as a friend) shortly before filing for bankruptcy, the trustee can reverse these preferential transfers and reclaim the property. They will sell it and distribute the proceeds appropriately among creditors.
Duties of the Trustee Under Chapter 13
Similar to a Chapter 7 trustee, a Chapter 13 trustee will review the information submitted by the debtor when they file for bankruptcy. They will need to determine whether the debtor has sufficient income to make the proposed payments. They also will need to assess whether creditors will receive as much from the repayment plan as they would through a Chapter 7 bankruptcy.
A Chapter 13 trustee will conduct the Section 341 meeting of creditors and will attend a confirmation hearing if this is needed. (Read more here about confirmation hearings, which usually arise from an objection to the debtor’s plan by a creditor or the trustee.)
While the debtor waits for approval of their repayment plan, the Chapter 13 trustee will hold their monthly payments in trust for creditors. If the court approves the plan, the trustee will start paying creditors from the funds and will continue until the plan is successfully completed three to five years later. They will be responsible for recording the payments received from the debtor and the amounts distributed to creditors. Meanwhile, they will review each proof of claim submitted by a creditor and object to any proof of claim that lacks adequate support.