When a Chapter 7 case is filed, or a case is converted from a Chapter 11 or Chapter 13 to a Chapter 7, a Chapter 7 Trustee is assigned for the case from the “Trustee Panel.” The Panel is made up mostly of lawyers in private practice, but may include accountants or other individuals with significant experience in Bankruptcy. Prior to being placed on the Panel, these individuals go through a background check and after their appointment they are overseen by the Office of the United States Trustee. Unlike Chapter 13 Trustees in Georgia, Chapter 7 Trustees normally have private practices in addition to acting as Trustees.
The Trustee’s duties vary by case, but here are the general duties of the Chapter 7 Trustee:
- The Trustee reviews the petition and schedules of every case assigned to them and conducts the First Meeting of Creditors.
- The Trustee reviews property owned by the debtors and the exemptions to see if there are assets are available for creditors. If so, the Trustee will liquidate (or sell) the assets. For example, if a debtor has significant equity in their home the Trustee may market it for sale to recover funds for the estate.
- If a debtor has transferred assets to other people prior to filing, the Trustee will file an action to “avoid” (or undo) the transaction to get the property back for the benefit of creditors. These are normally “preferential transfers” or fraudulent transfers.” For example, if someone transfers real estate to a family member to try to get it out of the reach of his creditors, and later files for Bankruptcy, the Trustee will get the property back and sell it. In addition, the Trustee may examine the documents related to the debtor’s house and, if improperly prepared, avoid the lender’s security interest (thereby increasing the equity).
- If funds are available for creditors, the Trustee will review claims filed by creditors and object if necessary.
- If the debtor has committed fraud in the Bankruptcy case or refuses to cooperate with the Trustee, the Trustee may file a lawsuit to deny the debtor a discharge pursuant to Section 727 of the Code or refer the matter to the United States Trustee for further action.
The Chapter 7 Trustee holds a unique position in the legal system. By voluntarily filing a Bankruptcy case, a person is agreeing to give the Trustee full access to their financial records and assets (see Section 521 and Bankruptcy Rule 4002). The Trustee has broad authority to investigate anything related to your finances or property, including getting documents from others. It is not like a lawsuit in another court, where the parties are essentially on equal ground. A few lawyers spend considerable time and effort fighting Trustees, but it often ends up wasting time and money for themselves and their clients. That said, very few Bankruptcy cases end up with a dispute between the debtor and Trustee. In fact, in most Chapter 7 cases in Georgia, the Chapter 7 Trustee will not even request additional documents beyond those initially required to be submitted. For the great majority of cases filed in Georgia, the Trustee only makes $60 per case. This may translate to $50,000 a year for an average caseload in a large city and for that they normally have to hire and pay administrative staff. They also spend scores of hours a year on the administrative duties of a Trustee, including strict accounting procedures. They do not have the resources to investigate a significant number of cases unless there is a reason to do so.
Importantly, the Chapter 7 Trustee is not a replacement for the debtor’s lawyer and the Trustee is not the Judge. Many debtors, with or without their own lawyer, will try to contact the Trustee for advice but Trustee’s are not allowed to give legal advice to other parties. It is also possible there is a legitimate dispute with the Trustee, and in those matters the issue may be resolved by the Judge. The Trustee does not sit in judgment of every Chapter 7 case. Once the Trustee concludes their review of the case, a discharge is entered by the Clerk’s office as a matter of course.
Most clients are a bit nervous before they meet the Chapter 7 Trustee at the First Meeting of Creditors, but they virtually always find that the Trustee is a nice person and not out to cause them more stress. If a client has a good lawyer and has supplied all the information requested, the case normally sails through the court.