The bankruptcy trustee is a person responsible for managing the bankruptcy process and distributing the assets of the bankrupt individual or company. This article discusses the role and duties of the trustee during the bankruptcy process, depending on the type of bankruptcy.
Types of Bankruptcy Trustees
Here’s how trustees operate in different types of bankruptcy:
Chapter 7 – Liquidation
Chapter 7 liquidation bankruptcy is available to individuals or businesses. Its goal is to liquidate certain debts to give the debtor a “fresh start.” In Chapter 7, the trustee takes control of the business’s assets and sells them or converts them to cash to pay creditors. The debtor may be able to keep some personal belongings and possibly real estate, known as “exempt property.”
Chapter 13 Repayment Plan
Chapter 13 repayment plan bankruptcy allows individuals with a regular income to keep their property and pay debts based on a repayment plan over three to five years. The court approves the plan and budget, and the trustee acts as a distribution agent, accepting payments from the debtor and distributing them to creditors according to the plan.
Chapter 11 Reorganization
Chapter 11 reorganization bankruptcy focuses on reorganizing the debts of an individual or company while continuing operations. Chapter 11 is primarily used for business bankruptcies. In most cases, no trustee is appointed for Chapter 11 bankruptcy. The debtor (known as the “debtor in possession”) manages the business and performs the trustee’s functions. If the court appoints a trustee, they take control of the debtor’s business and assets during the reorganization period. The trustee can appoint a creditors’ committee to consult with the debtor and participate in developing the plan.
Small Business Chapter 11
Small business Chapter 11 bankruptcy is a streamlined and simplified bankruptcy process for small businesses. These cases involve more oversight from the trustee, including an initial interview and monitoring of the debtor’s business activities. The trustee works with the debtor and creditors to create a reorganization plan that they all agree on.
What Does a Bankruptcy Trustee Do?
To understand how the standard bankruptcy process works, let’s take this example of Chapter 7. A typical case begins with the debtor filing a petition and providing information to the bankruptcy court about assets, liabilities, current income, expenses, and contracts they are currently obligated to. In turn, the court appoints a trustee who receives all the information regarding the case.
The trustee then takes the following steps:
- Collecting and converting the company’s financial assets to cash
- Investigating the debtor’s financial affairs
- Reviewing proofs of claims from creditors (those to whom the debtor owes money)
- Distributing funds to creditors according to a specific order
- Approving or opposing the discharge of specific debts (which allows the debtor to avoid repaying them)
- Submitting periodic and final reports to various governmental entities, including tax reports
Bankruptcy Trustees and Adversary Proceedings
Bankruptcy trustees can file adversary proceedings (AP) separate from the bankruptcy case; these are similar to lawsuits in other courts. AP can be filed to recover funds or property, determine the validity of a lien or other property rights, determine whether debt is dischargeable, or dismiss a creditor’s claim, or similar actions.
Final Tips
A bankruptcy trustee does not represent the debtor; they work on behalf of the bankruptcy court. You can represent yourself in bankruptcy court, but if your case is complex or if you don’t feel comfortable representing yourself, you can hire a bankruptcy attorney to represent you. Consider the bankruptcy trustee as a guide through the process. Your case will proceed more smoothly and quickly if you cooperate with the trustee by providing all requested information, attending creditors’ meetings, and responding promptly to requests.
The information in this article is not tax or legal advice and does not substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your specific state’s laws or the latest changes in the law. For current tax or legal advice, please consult a qualified accountant or attorney.
Thank you
On your notes!
Sources:
- U.S. Department of Justice. “About the Program.”
- United States Courts. “Chapter 7 – Bankruptcy Basics,” Note #5.
- U.S. Department of Justice. “Private Trustee information.”
- U.S. Department of Justice. “Bankruptcy Information Sheet.”
- United States Courts. “Chapter 13 – Bankruptcy Basics.”
- United States Courts. “Chapter 11 – Bankruptcy Basics.”
- Justia. “1994 US Code Title 11 – Bankruptcy Chapter 7 – Liquidation Subchapter I – Officers and Administration Sec. 704 – Duties of trustee.”
Source: https://www.thebalancemoney.com/what-is-a-bankruptcy-trustee-316199
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