What Does a Bankruptcy Trustee Do? Understanding the Trustee's Role

The word "trustee" appears throughout the bankruptcy process, and most people filing for bankruptcy encounter a trustee without fully understanding who this person is, what authority they have, or what they are looking for. In DC bankruptcy cases, there are actually multiple types of trustees, each with distinct roles, powers, and objectives.

Understanding what the trustee does -- and what the trustee is looking for -- helps you prepare for the process and avoid surprises.

The Three Types of Trustees

The bankruptcy system involves three distinct trustee roles:

1. Chapter 7 Panel Trustees -- Private attorneys or accountants appointed from a panel to administer individual Chapter 7 cases.
2. Chapter 13 Standing Trustees -- A trustee (or trustee's office) assigned to handle all Chapter 13 cases in the district, collecting plan payments and distributing funds to creditors.
3. The United States Trustee -- A component of the U.S. Department of Justice that oversees the bankruptcy system's administration, monitors case filings, and enforces compliance.

Each plays a different part, and their interests do not always align with each other or with the debtor.

The Chapter 7 Trustee

When you file a Chapter 7 case in the U.S. Bankruptcy Court for the District of Columbia, a panel trustee is randomly assigned to your case from the district's panel of approved trustees. The Chapter 7 trustee's primary duty is to maximize the return to your unsecured creditors by identifying and liquidating non-exempt assets of the estate.

The trustee's responsibilities include:

Reviewing your petition, schedules, and statements. The trustee receives your complete bankruptcy filing and reviews it for accuracy, completeness, and potential issues. The trustee is looking for undervalued assets, omitted property, unreported transfers, and potential avoidance actions.

Conducting the 341 meeting of creditors. Under 11 U.S.C. Section 341, every bankruptcy debtor must attend a meeting of creditors, commonly called the "341 meeting." The Chapter 7 trustee presides over this meeting, which is typically held approximately 30 to 45 days after filing. At the 341 meeting, the trustee places you under oath and asks questions about your assets, debts, income, expenses, and recent financial transactions.

The 341 meeting in DC is typically brief -- 5 to 15 minutes for a straightforward case. The trustee's questions are generally routine: verifying your identity, confirming you reviewed your petition, asking about your assets and any recent transfers. If the trustee identifies an issue -- an undervalued asset, a suspicious transfer, unreported income -- the questions may become more detailed, and the trustee may continue the meeting to a later date.

Liquidating non-exempt assets. If you own property that exceeds your available exemptions, the trustee has the power and duty to seize that property, sell it, and distribute the proceeds to your creditors. In practice, the vast majority of Chapter 7 cases in DC are "no-asset" cases -- the trustee reviews the schedules, conducts the 341 meeting, and concludes that there is no non-exempt property worth pursuing.

Investigating transfers and preferences. The trustee has the power to investigate pre-filing transfers of property. Under 11 U.S.C. Section 548, the trustee can avoid (reverse) fraudulent transfers made within two years before filing. Under Section 547, the trustee can avoid preferential transfers -- payments to specific creditors made within 90 days of filing (or one year for payments to insiders such as family members). If you paid back a family loan, transferred property to a relative, or made large payments to a single creditor shortly before filing, the trustee will scrutinize these transactions.

Objecting to exemptions. If the trustee believes you have improperly claimed an exemption -- either by using the wrong exemption statute or by overvaluing exempt property -- the trustee can file an objection. You then have the burden of demonstrating that the exemption is properly claimed.

Filing the final report and distributing funds. In asset cases, the trustee liquidates non-exempt property, resolves any claims disputes, and files a final report with the court. The trustee then distributes funds to creditors according to the priority scheme established by the Bankruptcy Code. The trustee is compensated from the estate under the fee schedule in 11 U.S.C. Section 326.

The Chapter 13 Trustee

The Chapter 13 trustee in DC operates differently from the Chapter 7 trustee. Rather than liquidating assets, the Chapter 13 trustee administers your repayment plan over its three-to-five-year term.

The Chapter 13 trustee's responsibilities include:

Reviewing your proposed plan. The trustee evaluates whether your Chapter 13 plan meets the requirements of the Bankruptcy Code -- specifically, whether it is feasible (you can actually make the proposed payments), whether it pays priority claims in full, whether it satisfies the liquidation test (creditors receive at least as much as they would in a Chapter 7 liquidation), and whether it commits all of your projected disposable income to the plan under 11 U.S.C. Section 1325(b).

Collecting plan payments. You make monthly payments to the Chapter 13 trustee, not directly to your creditors. The trustee collects these payments, takes a percentage as a fee (typically 5 to 10 percent, set by the U.S. Trustee for the district), and distributes the remainder to your creditors according to the plan.

Distributing funds to creditors. The trustee processes and distributes payments to creditors throughout the plan term. The trustee handles priority claims (taxes, domestic support obligations) first, then secured claims, then general unsecured claims.

Conducting the 341 meeting. Like the Chapter 7 trustee, the Chapter 13 trustee conducts the meeting of creditors. In Chapter 13 cases, the trustee's questions focus on your income, expenses, and the feasibility of the proposed plan.

Monitoring plan compliance. The trustee tracks whether you are making plan payments on time and whether you are complying with other plan obligations (such as maintaining insurance on secured collateral). If you fall behind on payments, the trustee may move for dismissal of your case or conversion to Chapter 7.

Filing objections and motions. The trustee may object to your plan if it does not meet the legal requirements. The trustee may also file motions to dismiss the case for failure to make payments, failure to file tax returns, or other compliance issues.

The United States Trustee

The U.S. Trustee is not assigned to your individual case in the same way the panel or standing trustee is. Instead, the U.S. Trustee's office -- a component of the Department of Justice's Executive Office for U.S. Trustees -- oversees the bankruptcy system as a whole in the district.

The U.S. Trustee's responsibilities include:

Appointing and supervising panel trustees. The U.S. Trustee selects and monitors the private attorneys and accountants who serve as Chapter 7 panel trustees.

Reviewing means test compliance. After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the U.S. Trustee reviews every Chapter 7 filing to determine whether the debtor's income exceeds the median for the applicable household size. If it does, the U.S. Trustee evaluates whether a presumption of abuse arises and may file a motion to dismiss the case or convert it to Chapter 13 under 11 U.S.C. Section 707(b).

Monitoring for fraud and abuse. The U.S. Trustee investigates potential fraud, concealment of assets, and abuse of the bankruptcy system. The office can refer cases for criminal prosecution to the U.S. Attorney.

Setting fee guidelines. The U.S. Trustee establishes guidelines for Chapter 13 trustee fees and reviews fee applications filed by professionals in Chapter 7 and Chapter 11 cases.

What the Trustee Looks For

Regardless of chapter, trustees are looking for specific issues in every case:

• Undisclosed assets. Did you fail to list a bank account, a vehicle, a tax refund, or other property?
• Undervalued assets. Did you assign an unrealistically low value to your home, car, or other property to bring it within exemption limits?
• Recent transfers. Did you give away property, repay family members, or move assets out of your name before filing?
• Unreported income. Did you disclose all sources of income, including side work, rental income, and cash payments?
• Lifestyle inconsistencies. Does your reported income and expense picture match your actual lifestyle? A debtor who claims minimal income but lives in an expensive home and drives a luxury vehicle will attract scrutiny.
• Preferential payments. Did you pay certain creditors (especially family or friends) ahead of others in the months before filing?

Preparing for Your Interaction with the Trustee

The best preparation is honest, complete, and accurate disclosure on your bankruptcy schedules and statements. Trustees are experienced professionals who review hundreds of cases. They can identify inconsistencies quickly. Attempting to hide assets or minimize income is not only unethical -- it is a federal crime under 18 U.S.C. Section 152.

Your bankruptcy attorney will prepare you for the 341 meeting, review your schedules for accuracy, and identify any issues that the trustee is likely to raise. Proper preparation turns the trustee meeting from a source of anxiety into a brief, routine proceeding.

Contact Steven C. Fraser, P.A. at (202) 417-8128 or toll-free at (877) 862-7188 to discuss your bankruptcy case and prepare for every step of the process, including the trustee meeting.