Besides your creditors, the main person you need to be careful about in a “straight bankruptcy Chapter 7 case is the trustee. Who’s that?
The Trustee Is a Liquidator, Sometimes
Chapter 7 is sometimes called the “liquidation” kind of bankruptcy. But in most consumer cases no liquidation—the selling of assets—happens. That’s because usually everything the debtor owns is “exempt”—protected from liquidation.
The Chapter 7 trustee is the official who determines if a debtor has any assets that are not exempt. If so, the trustee takes possession of them, sells them, and distributes the proceeds to the creditors.
Information for the Trustee
The main source of information for the trustee about your assets is the paperwork you provide him or her. Most of that is in contained in the documents you and your lawyer prepare and file at the bankruptcy court. You also provide some verifying documents to the trustee directly.
The bankruptcy documents consist of dozens of pages of “schedules” or lists of your creditors and your assets, and answers to many financial questions. You review these carefully with your lawyer, sign them under penalty of perjury, and they’re filed at court.
These documents include a list of the “exemptions” you’re claiming. Those usually show that everything (just about everything) you own is protected from liquidation by the trustee.
The “Meeting of Creditors”
The trustee is in charge of the so-called “meeting with creditors.” It’s called a “meeting of creditors” but in consumer cases often only the trustee, you, and your lawyer attend. It happens about a month after filing your Chapter 7 case. The trustee asks you and your lawyer questions based on the information in the documents filed and otherwise provided. The questions mostly focus on your assets and exemptions you’ve claimed.
This is an important but usually rather informal meeting. It usually lasts about 10 minutes, sometimes shorter. Usually the bankruptcy documents point clearly to the fact that all your assets are exempt. If so, the trustee may (depending on local custom) “declare the case to be a no-asset case.” This means that everything you own is exempt; you have nothing for the trustee to liquidate. You get to keep everything.
Other Trustee Responsibilities
It’s not unusual for the trustee to ask debtors or their attorneys to provide additional information or documents. These are usually to clarify or verify what is in the bankruptcy paperwork. He or she can also investigate independently or through the help of others. For example, if you own something potentially valuable the trustee could have an appropriate expert appraise it to see your valuation is reasonable.
Also, if the trustee sees something suspicious he or she could pursue the matter. At some point the trustee could refer it to the United States Trustee. The U.S. Trustee is the enforcer of the bankruptcy system, and essentially the trustee’s boss. This office usually stays in the background in consumer bankruptcy cases. Part of its job is to oversee compliance with the bankruptcy laws. The U.S. Trustee mostly tends to get involved if a debtor has tried to hide significant assets.
These kinds of problems almost never happen as long as you are honest with your lawyer. Be candid and thorough with him or her so that potential problems can be avoided. There are usually workable solutions.
Is the Trustee Your Adversary?
Yes, it’s the Chapter 7 trustee’s job to represent your creditors. Mostly he or she does that by finding non-exempt assets to liquidate and distribute to the creditors. And the trustee can refer you to the U.S. Trustee if he or she encounters any serious bad behavior. So the trustee is legally your adversary.
But most of the time nothing bad happens. Your only contact with the trustee is often nothing more than a reasonably friendly “meeting of creditors” that’s over before you know it.