The Bankruptcy Trustee: Powers, Duties, and Responsibilities

The bankruptcy trustee is a central figure in bankruptcy proceedings, serving as the representative of the bankruptcy estate and the interests of creditors. For paralegals working in bankruptcy practice and CP exam candidates studying debtor-creditor relations, understanding the trustee's role is essential. This article examines the trustee's functions in both Chapter 7 and Chapter 13 cases, the trustee's specific powers, and the practical implications for paralegal work.

What Is the Bankruptcy Trustee's Primary Role?

The bankruptcy trustee is appointed to administer the bankruptcy estate. The estate consists of essentially all property and assets the debtor owns at the time of filing, subject to applicable exemptions. The trustee's primary purpose varies depending on the chapter under which the case is filed:

Chapter 7 (Liquidation): The Chapter 7 trustee's primary role is to collect and liquidate the debtor's non-exempt assets and distribute the proceeds to creditors according to the priority scheme established by the Bankruptcy Code.
Chapter 13 (Wage Earner's Plan): The Chapter 13 trustee oversees the debtor's repayment plan, receives payments from the debtor, and distributes those payments to creditors in accordance with the confirmed plan.

How Is a Bankruptcy Trustee Appointed?

The appointment process differs depending on the chapter:

Chapter 7: An interim trustee is appointed from a panel of private trustees maintained by the United States Trustee (a component of the Department of Justice). The interim trustee becomes the permanent trustee unless creditors elect a different trustee at the meeting of creditors (which rarely occurs).
Chapter 13: A standing trustee is typically assigned to handle all Chapter 13 cases in a particular district or division. Standing trustees handle a high volume of cases and have established systems for managing plan payments.

What Are the Trustee's Specific Duties?

Under Section 704 of the Bankruptcy Code, the Chapter 7 trustee has numerous specific duties:

Investigating the Debtor's Financial Affairs: The trustee examines the debtor's schedules, tax returns, bank statements, and other financial records to identify assets, potential claims, and any irregularities.
Conducting the Meeting of Creditors: The trustee presides over the Section 341 meeting of creditors, where the debtor is placed under oath and questioned about their financial affairs, property, and the accuracy of their schedules.
Collecting and Liquidating Estate Property: The trustee identifies, takes possession of, and sells non-exempt assets of the estate. This may involve selling real property, personal property, business assets, or financial accounts.
Objecting to Exemptions: If the trustee believes a debtor has improperly claimed an exemption, the trustee can file an objection with the court.
Examining Proofs of Claim: The trustee reviews claims filed by creditors and can object to claims that are improperly filed, overstated, or unsupported.
Distributing Proceeds: After liquidating assets, the trustee distributes the proceeds to creditors according to the priority scheme: secured creditors first, then priority unsecured creditors (such as tax obligations), then general unsecured creditors.
Filing Reports: The trustee files reports with the court and the United States Trustee regarding the administration of the estate.

What Special Powers Does the Trustee Have?

The Bankruptcy Code grants the trustee several powerful tools:

Avoidance Powers: The trustee can avoid (undo) certain transfers made by the debtor before filing:
- Preferences (Section 547): Payments to creditors made within 90 days before filing (or one year for insiders) that give the creditor more than it would receive in a Chapter 7 liquidation.
- Fraudulent Transfers (Section 548): Transfers made with intent to defraud creditors or for less than reasonably equivalent value within two years before filing.
Strong-Arm Powers (Section 544): The trustee has the rights of a hypothetical judicial lien creditor and a bona fide purchaser, allowing the trustee to avoid unperfected security interests and certain other liens.
Power to Assume or Reject Executory Contracts: The trustee can decide whether to assume (continue) or reject (breach) contracts and leases that have not been fully performed by either party.

The Paralegal's Interaction with Bankruptcy Trustees

Paralegals working in bankruptcy frequently interact with trustees by preparing documentation for the meeting of creditors, responding to trustee requests for financial records, filing proofs of claim on behalf of creditor clients, and preparing objections to improper claims or exemptions. Understanding the trustee's perspective helps paralegals anticipate issues and prepare more effectively.

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Bankruptcy Trustee Role and Responsibilities: A Guide for Paralegals