What is the job of a trustee?
In every Chapter 7 bankruptcy there is a trustee, who is a private individual, usually a bankruptcy lawyer. His job, or her job, is to see if you have any property that can be turned into cash to pay your creditors. When you file Chapter 7, everything you own becomes property of the “bankruptcy estate,” and the trustee reviews your list of assets to see if anything has value. Most individual debtors don’t have enough property to interest a trustee, primarily because state law provides for “exemptions” that protect the kinds of property that most people own. In Illinois, as of 2021, the first $15,000 in equity in a home ($30,000 for a married couple) is completely exempt from the reach of creditors or a trustee. If, after subtracting your mortgage amount from the value of your home, the equity is no more than the exemption amount, your home is protected.
There is also a $2,400 exemption in one vehicle per person; all of the value of necessary wearing apparel is exempt, and there is a $4,000 exemption in “all other personal property.” If you add up the value of all your furniture, carpets, computers, pictures, and forks and knives, the value probably adds up to more than $4,000; but a trustee is not likely to send people to your home to hold a garage sale. If you have valuable artworks, antiques, or collectibles, or if your car is worth a lot more than the $2,400 exemption (after deducting the loan amount), or if you have much more than $15,000 equity in your home, you might not want to file a Chapter 7. If you are filing bankruptcy, make sure you discuss the value of all your property with your lawyer to avoid any surprises.
In addition, if anyone owes you money, or if you have a claim against a person or company for a personal injury, property damage, or malpractice claim, the trustee is entitled to try to collect money from those kinds of claims. Make sure you discuss these kinds of claims with your lawyer, because failing to disclose them in your bankruptcy could mean that you can never collect on the claim yourself.
In a business Chapter 7, the trustee looks at assets such as machinery & equipment, accounts receivable, and inventory, to see if they can bring in any money to pay creditors. There are no exemptions for a corporation, partnership, or limited liability company. The trustee has to decide whether it is worth the effort to liquidate assets of those types.
Besides determining whether to sell assets, a Chapter 7 trustee can file a motion or complaint with the court if she or he believes that you have been dishonest in dealing with the court or creditors; for example, if you have filed false documents, or hidden or given away assets to keep them away from the trustee. A trustee can also try to recover money or other property that you have transferred, either by giving away or selling assets, or even paying creditors. These “avoidance” actions are complicated and involve litigation within the bankruptcy case. You need an experienced bankruptcy attorney to find out whether the possiblity of such actions exists before filing bankruptcy.
In a Chapter 13, which is a way to pay back some of your debts over time, there is also a trustee, but the Chapter 13 Trustee is an office full of people who receive your payments, compute how much each creditor should get, and send payments out to creditors. The Chapter 13 Trustee does not take control of your property; rather, you make a payment each month (or each pay period) to the trustee’s office, and the trustee’s office makes monthly distributions to your creditors. One reason to choose Chapter 13 over Chapter 7 is that you do have property that has enough value that a Chapter 7 trustee would be able to take the property and sell it; in a Chapter 13, you keep everything you own, and your repayment plan will work as long as you can pay creditors the value of your property (and the plan payments are also affected by how much you can afford on a monthly basis). The Chapter 13 Trustee also reviews your repayment plan and makes a recommendation to the bankruptcy as to whether the plan should be approved.
In a Chapter 11, which is usually a business reorganization for a company or an individual in business, there is no trustee. The debtor remains in possession and control of all of its assets, and in fact is called a “debtor in possession.” There is a government agency called the “United States Trustee”; its job is to review everything that is filed, follow the status of the case, and make recommendations to the court if there are problems with the case. The United States Trustee can ask the court to dismiss the case, or convert it to a Chapter 7 liquidation case, if the case does not look likely to succeed, or if it appears that you are not following the rules.
If you have other questions about the role of a trustee, or about any other aspect of a bankruptcy, call us. We’re here to help, and the first consultation is free.