The Role of Chapter 7 Trustees

Many of my clients are confused, at best, when it comes to the role of trustees in bankruptcy. Many are vaguely aware that such a thing exists, but most do not fully understand who a trustee is, what the trustee's role is, and what powers the trustee actually has. In this post I will give much of the same explanation that I give to my new clients. [Editor's Note: No Chapter 7 Trustees (or former colleagues) were harmed in the writing of this blawg post.]

Trustees in bankruptcy come in a variety of forms. The United States Trustee oversees and officially administers all bankruptcy cases nationwide. In Chapter 7 (liquidation) cases, a private individual is appointed to administer the assets. Chapter 7 trustees are appointed from a panel of trustees who are themselves usually attorneys or accountants. In Massachusetts, where I practice, all of the Chapter 7 panel trustees are bankruptcy attorneys.

Chapter 7 is available to both businesses (such as corporations, limited liability companies, limited partnerships, etc.) and natural people (i.e., individuals). When a company files for bankruptcy under Chapter 7, the company is typically shut down immediately and all of its assets are liquidated (turned into cash) by the appointed Chapter 7 trustee, and the cash is then distributed to the company's creditors on a pro rata basis, pursuant to certain priorities established by the bankruptcy code.

In theory the same thing happens when individuals file a petition for relief their creditors under Chapter 7. However, in the case of individuals many assets are protected by virtue of the many exemptions available to individuals under either state or federal law.

In either a corporate Chapter 7 or an individual Chapter 7 case, the debtor or (in the case of a corporation) its representative attends a "meeting of creditors" pursuant to Bankruptcy Code s. 341(a). All creditors are invited to attend the meeting of creditors and the appointed trustee questions the debtor about her assets, debts, income and expenses.

In the vast majority of individual Chapter 7 cases, the appointed trustee will find that there are no non-exempt assets available to the bankruptcy estate, and will determine the debtor's case to be a "no asset" case. In these instances, the Chapter 7 trustee files a Trustee's No Distribution Report (or NDR) with the Court and the case is basically over for the debtor.

However, in cases in which the trustee determines that there are assets -- including some things, such as litigation that the average person may not consider to be assets -- the trustee will begin the work of obtaining and liquidating assets.

When you are considering seeking bankruptcy relief it is crucial to have the advice and assistance of a qualified bankruptcy attorney to help you to maximize your exemptions and protect your property exempt assets from the reach of the trustee. If you are considering bankruptcy call the Law Offices of James Wingfield at 508-797-0200, we can help.