Role of the Bankruptcy Trustee
Upon the filing of chapter 7 bankruptcy, an impartial case trustee is
appointed by the United States trustee (or by the court in Alabama and
North Carolina) to administer the case and liquidate the debtor's
nonexempt assets. 11 U.S.C. §§ 701, 704. If, as is often
the case, all of the debtor's assets are exempt or subject to valid liens,
there will be no distribution to unsecured creditors.
Typically, most
chapter 7 cases involving individual debtors are "no asset"
cases. If the case appears to be an "asset" case at the outset,
however, unsecured creditors who have claims against the debtor must file their claims with the clerk of court within 90 days after the first date set for the meeting of
creditors. Bankruptcy Rule 3002(c).
In a typical no asset chapter
7 bankruptcy, there is no need for creditors to file proofs of claim. If the
trustee later recovers assets for distribution to unsecured creditors,
creditors will be given notice of that fact and additional time to file
proofs of claim. Although secured creditors are not required to file
proofs of claim in chapter 7 cases in order to preserve their security
interests or liens, there may be circumstances when it is desirable to do
so. A creditor in a chapter 7 bankruptcy who has a lien on the debtor's property
should consult an attorney for advice.
The commencement of a bankruptcy case creates an "estate."
The estate technically becomes the temporary legal owner of all of
the debtor's property. The estate consists of all legal or equitable
interests of the debtor in property as of the commencement of the case,
including property owned or held by another person if the debtor has an
interest in the property. Generally speaking, the debtor's creditors are
paid from any remaining nonexempt property of the estate.
The primary role of a chapter 7 trustee in an "asset" case is to liquidate the debtor's nonexempt assets in a manner that maximizes the
return to the debtor's unsecured creditors. To accomplish this, the
trustee attempts to liquidate the debtor's nonexempt property, i.e.,
property that the debtor owns free and clear of liens and the debtor's
property which has market value above the amount of any security interest
or lien and any exemption that the debtor holds in the property.
The trustee also pursues causes of action (lawsuits) belonging to the debtor
and pursues the trustee's own causes of action to recover money or
property under the trustee's "avoiding powers." The trustee's
avoiding powers include the power to set aside preferential transfers made
to creditors within 90 days before the petition, the power to undo
security interests and other pre-petition transfers of property that were
not properly perfected under non-bankruptcy law at the time of the
petition, and the power to pursue non-bankruptcy claims such as fraudulent
conveyance and bulk transfer remedies available under state law.
In addition, if the debtor is a business, the bankruptcy court may authorize
the trustee to operate the debtor's business for a limited period of time,
if such operation will benefit the creditors of the estate and enhance the
liquidation of the estate. 11 U.S.C. § 721.
The distribution of the property of the estate is governed by section
726 of the Bankruptcy Code, which sets forth the order of payment of all
claims. Under section 726, there are six classes of claims, and each class
must be paid in full before the next lower class is paid anything. The
debtor is not particularly interested in the trustee's disposition of the
estate assets, except with respect to the payment of those debts which for
some reason are not dischargeable in the bankruptcy case. The debtor's
major interests in a chapter 7 bankruptcy are in retaining exempt property and
in getting a discharge that covers as many debts as possible.
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