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What Does The Trustee Do During the Four or Five Years that the Chapter 7 is Being Administered?

By Joseph McDaniel, Esq.

Everybody gets it that a Chapter 13 Bankruptcy Trustee in Arizona works for the life of the case; he supports or objects to the confirmation of the Chapter 13 Plan, he reviews the terms of the plan to determine whether it meets the requirements of the Code, and monitors the payments during the (usually) five years of the Plan.

A smart client of mine recently asked me what a Chapter 7 Trustee does during the four or five years that the case is open for administrative purposes, and how much involvement the debtor would have in the Chapter 7 during that period of time.

And I thought that was a pretty good question!

Here's the answer: it's almost like a probate case. First the bankruptcy estate comes into existence pursuant to 11 USC 541, and simultaneously the automatic stay comes into existence pursuant to 11 USC 362, to protect both the debtor and the estate, so that neither property of the estate or the debtor is dismembered in the creditor's race of diligence.

And the trustee will review the file and decide whether the case is a "no-asset" case or an asset case, which will determine whether the case gets administered or stamped "no asset" and tossed on the huge pile of no-asset cases.

And if there are assets, the Chapter 7 Trustee will typically hire a lawyer to help, and they will see that notices go out to creditors to file Proofs of Claim by a bar date.

Then they "work the claims", which simply means that they object to the claims that appear goofy, and don't object to the claims that appear legit.

That starts what amounts to a bundle of little (or big) lawsuits in the Bankruptcy Court, as the Trustee's Lawyer and the Creditor's Lawyer go toe to toe in front of the Judge to determine whether the claim will be allowed.

More likely a deal will be cut and some smaller amount than the face amount on the Proof of Claim will be allowed for purposes of distribution out of the estate.

In addition, the trustee will file suits to collect preferences or fraudulent transfers, and to increase the size of the estate and the distribution to creditors by that means.

Eventually, when all the dust has settled in four or five years, the distributions get made, and a final report!

Full post as published by Arizona Bankruptcy Attorney Blog on March 17, 2011 (boomark / email).