Trustee in Chapter 7 Bankruptcy

When you file a a chapter 7 bankruptcy, everything you own and owe is legally transferred to a Bankruptcy Trustee, who can then use your assets to pay your debts. If you have more debts than assets, then those debts are (usually) “discharged” or wiped out (there are exceptions for some debts, which is part of why bankruptcy law is specific and complicated). This means that a debtor generally does not have the right to sell his own assets between filing bankruptcy and getting a discharge. If you’re interested in reading the actual Bankruptcy code, go for it here. The Bankruptcy Trustee is appointed by the Justice Department, is usually an attorney or an accountant, and is paid from the filing fees and (sometimes) commissions on the sales of assets sold.

In a chapter 7 bankruptcy you are allowed to keep either the (1) “wildcard” exemption, worth $29,275 in assets and cash that you select (such as cars and checking accounts), or (2) the “homestead exemption” which allows you to keep $300,000 – $600,000 of the equity in your primary residence in California depending on the median sales price of a home in your county. And, you always keep all of your retirement accounts through bankruptcy: 401k’s, and 403b’s, and up to $1.3 million in IRAs. The Trustee has the duty to investigate your assets and determine what s/he may sell off to satisfy creditor claims. Usually, because of the above exemptions, there is nothing to sell off. As a result, as soon as the bankruptcy is ended, and debts discharged, legal ownership of the assets the debtor is keeping returns to the debtor from the Trustee.

Trustee in Chapter 13 Bankruptcy

In chapter 13 bankruptcies, which involve a personal reorganization, there are two Trustees: the debtor himself, and the chapter 13 Trustee. Here, the bankruptcy estate includes the next five years of the debtor’s income, which is used to pay off the debtor’s creditors. The Trustee monitors and ensures that the debtor is making the payments agreed to in the chapter 13 plan. The debtor keeps legal title to goods throughout the five years of the plan. For more details on chapter 13 bankruptcy read here.

Trustee in Chapter 11 Bankruptcy

In Chapter 11 bankruptcies, which involve the reorganization of the debts of a business, the debtor company is also the Trustee, a position known as the “debtor-in-possession.” In corporate cases, the company’s former management may continue to serve as the debtor-in-possession; in cases of willful mismanagement, the court may oust the former management and install a new Trustee.

August 26, 2021

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