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The Role of a Bankruptcy Trustee

May 17th, 2019 at 2:45 pm

Texas bankruptcy attorneyComing to the decision that your best option is to file for bankruptcy is not easy. You may have taken weeks, if not months to realize that your best option is bankruptcy. The bankruptcy process can be confusing because of all of the legalities and people involved with the process. When you file for bankruptcy, the United States Trustee Program will assign you a bankruptcy trustee who will be responsible for overseeing your case. The trustee is one of the most important people in your case, so it is crucial that you understand the role of the trustee and the impact the trustee can have on your case.

What Is a Bankruptcy Trustee?

The role of a trustee was created to prevent the creditors and courts from having to be the ones responsible for collecting and distributing the property of those who file for bankruptcy. Trustees are independent contractors who are not employees of the bankruptcy court, but they must answer to the court and cannot take any kind of action until the court approves it. The trustee will evaluate and make recommendations pertaining to the demands of different debtors involved in the specific bankruptcy case they are assigned to.

Role of the Bankruptcy Trustee

The role of a trustee differs based on the type of case they are assigned to. Most bankruptcy cases will be assigned a trustee, except for Chapter 11 reorganization plans and Chapter 9 municipality cases.

Chapter 7 Bankruptcy Trustees

In Chapter 7 bankruptcy, your trustee is responsible for a couple of different things. First, it is the trustee’s job to make sure your bankruptcy claim is legitimate and not fraudulent. Your trustee will also be the person who determines whether or not you have any non-exempt assets. If you do, the trustee will also manage the sale of your assets and oversee the distribution of the proceeds to your creditors.

Chapter 13 Bankruptcy Trustees

The role of a trustee in a Chapter 13 bankruptcy is slightly different because the types of bankruptcies differ from each other. A Chapter 13 bankruptcy deals with a repayment plan, which your trustee will be responsible for overseeing. Your trustee will be your liaison between you and your debtors, making sure you have an affordable repayment plan, collecting your payments and distributing them to your debtors.

Contact a Texas Bankruptcy Attorney Today

One of the many aspects of a bankruptcy is the trustee, which is a crucial piece to the puzzle. Your trustee will make sure you have a reasonable bankruptcy plan, but sometimes you also need extra help. If you are thinking about filing for bankruptcy, you should talk with an experienced Kerrville, TX bankruptcy attorney. At the Law Offices of Chance M. McGhee, we will help you determine whether or not bankruptcy is appropriate for your situation. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://www.creditkarma.com/advice/i/bankruptcy-trustee/

https://www.thebalance.com/who-is-a-bankruptcy-trustee-316199

https://www.investopedia.com/terms/b/bankruptcy-trustee.asp

Timing: Avoiding Very Troublesome “Preference” Payments

October 2nd, 2017 at 7:00 am

Sometimes in bankruptcy doing the honestly right thing can cause you major problems. Making preference payments is a good example of this. 


The Understandable Inclination to Pay a Favored Creditor

If you’re having financial problems and considering bankruptcy, you might feel compelled to first take care of a special debt. You may owe a relative or friend who is in real need of the money. You may feel deep and legitimate pressure to pay part or all of it in spite of your own financial problems. You may figure, accurately or not, that you won’t be allowed to pay this person after filing bankruptcy. Or for various reasons you may not want to involve this person in your bankruptcy case. You may not want to have him or her know about it. So you figure the best way to do that is to pay off or settle the debt beforehand.  

But your intentions—good or otherwise—could significantly backfire, if you don’t know the law and don’t get good advice.

The Dangerous, but Avoidable, “Preference” Payment

“Preference” payments are among the most frustrating situations in bankruptcy. They seldom happen but are a major headache when they do.

Because of the trouble they can cause, trouble that is often easy to avoid, “preferences” are worth understanding.

The Law on “Preferences”

So what are “preferences” and why are they a problem?

Bankruptcy law say that if during the 365 day-period BEFORE filing a bankruptcy case you pay a creditor more than you are paying at that time to your other creditors, then AFTER your bankruptcy is filed that favored creditor could be forced to surrender to your bankruptcy trustee the money that you had paid to this creditor earlier. (See Section 547 of the U.S. Bankruptcy Code on “Preferences.”)

In other words if you pay a special creditor during the year before filing bankruptcy, that person (or business) could be required to return that money.

The money would usually be returned not to you but to your bankruptcy trustee, to be re-distributed among your creditors. So instead of having a satisfied favored creditor, you would likely have a very unhappy one. You had wanted to fulfill your moral obligation to the creditor. Instead he or she would get a legal demand by your trustee to cough up the money you’d paid. Your friend/relative would have to scrape up the money you paid to him or her months earlier—very likely spent by then—to pay to the trustee.

After this would happen you may even feel morally compelled to pay that person yourself a second time. You might want to make up for the money the trustee took away from him or her.

The Point of “Preference” Law

What could possibly be the point of this 1-year “preference” rule? It is meant to promote one of the basic principles of bankruptcy law—legally equal treatment of creditors. This principle applies mostly DURING your bankruptcy case. However, to a limited extent the law also looks 1 year backwards from the time you and your bankruptcy lawyer file your case.  

So people in financial trouble are discouraged from playing favorites among their creditors for a year before filing bankruptcy. This is supposed to make the situation more financially fair to all the creditors.

One Scenario

Here’s an example to help make sense of this odd concept.

Imagine that you’ve owed your sister $3,000 for money she lent you so that you could pay your rent. You haven’t had the money to pay any of it back. She now really needs the money. Plus you really don’t want her or the rest of your family to know you’re filing bankruptcy. You’ve stopped paying other creditors for a while so you’ve scraped together the money to pay off this debt. You intend to pay it off and then file bankruptcy right after because you’ve recently been sued by a creditor. You know your paycheck is getting garnished in a few weeks if you don’t stop that by filing bankruptcy.

But here’s what would happen if you paid off your sister and then filed bankruptcy (within a year after).

A month or two after filing bankruptcy your bankruptcy trustee would very likely demand that your sister pay $3,000 to the trustee. If she didn’t pay, the trustee would likely sue her to make her pay. Once she did pay, that $3,000 would be divided among your creditors according to a set of priority rules. Your sister would be out $3,000. You may then feel obligated to pay her that, again. She (and probably your whole family) would know about your bankruptcy filing. Everybody would be unhappy.

It’s Usually an Avoidable Problem

This “preferences” mess can be avoided simply by not paying your favored creditors anything during the year before filing. This includes both money and anything else of value.

And if you do pay anything to such clients, hold off on filing bankruptcy for a year after.

That’s easier said than done when you have creditors suing or creating other collections problems. Your lawyer could likely help keep these creditors at bay. More broadly he or she would put together your best game plan for dealing with all of this.

 

The Chapter 13 Trustee

September 8th, 2017 at 7:00 am

The Chapter 13 trustee is an important player in your “adjustment of debts” case so it helps to know how to deal with him or her. 

 

Chapter 13 Trustee vs. the Chapter 7 One

In a Chapter 7 “straight bankruptcy” case the bankruptcy trustee’s role is very different than in a Chapter 13 case.

Most Chapter 7 consumer cases involve a quick determination whether you can keep everything you own—whether it’s all “exempt.”  It’s the Chapter 7 trustee’s job to determine this. This would usually happen within about a month after you and your bankruptcy lawyer would file your case. If everything is exempt—as it usually is—your case is usually done 2 or 3 months later. The trustee has some other important roles but in most cases nothing comes of them. Within about 4 months of filing your case is finished.

A Chapter 13 case is very different and so the role of the trustee is as well. Your Chapter 13 case is based on a three-to-five-year payment plan. So a lot of it involves putting together, getting court approval for, and then implementing that payment plan. The plan usually greatly reduces what you need to pay to most of your creditors. It often allows you to pay much more to secured creditors and special “priority” creditors to achieve certain goals. Then by the end of your Chapter 13 case usually some of your debts have been paid off or else get written off then.

The Chapter 13 trustee is involved in every step of this process, and has various roles along the way.

Plan Requirements

The Chapter 13 payment plan you and your bankruptcy lawyer propose can have a fair amount of flexibility. But that plan also has to follow the law in many ways. The trustee’s first role is to ensure that your plan complies with legal requirements. So the trustee raises concerns about any aspects that he or she finds inappropriate. He or she works with you and your lawyer to adjust the plan accordingly. For example, the trustee tries to ensure you pay into your plan as much as the law requires you to. In this role the trustee acts on behalf of all the creditors, especially the unsecured ones. Usually these kinds of trustee concerns are resolved through compromise, or by having the bankruptcy judge decide the matter.

Monitoring the Plan

Your Chapter 13 plan is approved by the judge, usually about two or three months after you file your case. It’s approved, or “confirmed,” either as originally proposed or after it goes through some adjustments. After “confirmation” the trustee and his or her staff continues to monitor your case closely to see if you are complying with the plan throughout the three-to-five-years that it will likely take to complete. They make sure you’re making the monthly payments. They review your yearly income tax returns to see if your income stays reasonably stable. The trustee’s office contacts you and your lawyer about concerns that may arise. They can file a motion to dismiss your case if you don’t comply with your payment plan.

Disburse Payments to Creditors

The trustee collects payments from you and distributes the money according to the terms of the court-approved plan.  Related to this, the trustee’s staff reviews your creditors’ proofs of claim. These are documents filed by your creditors to show how much they claim you owe. The trustee may object to ones he or she believes are not appropriate. Then, when you have finished paying all that’s required under your plan, the trustee informs you and the bankruptcy court. Then the court discharges (writes off) the rest of your remaining debt (except for long-term debts like a home mortgage).

Final Comments

Both Chapter 7 and Chapter 13 trustees are not court employees but private individuals, carefully vetted and monitored. The Chapter 7 trustees are selected out of a “panel” of several trustees within each bankruptcy court. So your lawyer would usually not know which of the trustees from the panel would be assigned to your case. In contrast, there is usually only one “standing” Chapter 13 trustee assigned cases from each bankruptcy court or area. So your lawyer will usually know which Chapter 13 trustee will be assigned to your case.

 

Example of a Simple Chapter 7 “Asset Case”

June 21st, 2017 at 7:00 am

Chapter 7 “asset” cases may sound scary. They needn’t be. We walk you through a very straightforward example to demystify this.  

 

Asset and No-Asset Chapter 7 Cases

Our last blog post discussed the difference between a no-asset and asset Chapter 7 case. Simply put, in a no-asset case everything you own is covered and protected by available property exemptions. So your trustee takes nothing from you. In contrast, in an asset case, something you own is not covered by a property exemption. So the trustee takes it, sells (“liquidates”) it, and distributes the proceeds to your creditors.

We ended our last blog post with a short example of what happens in an asset case if you happen to owe certain kinds of debt that you’d still have to pay after bankruptcy, such as accrued child support or recent income taxes. The Chapter 7 trustee pays such special “priority” debts in full before paying anything on ordinary debts. That way most of your asset proceeds go to a debt that you have to pay anyway.

But what if you don’t have any such priority debts? What happens in an otherwise simple Chapter 7 case in which you to have an asset that the trustee gets and liquidates?

Our Simple Example

Assume someone named Hannah owes $80,000 in a combination of personal loans, credit cards, and medical bills. Her income qualifies her for a Chapter 7 case under the “means test” in her state with her family size. Under the property exemptions that the law provides to her, everything she owns is exempt except for one thing. She owns, free and clear, a sailboat with a fair market value of $8,000. (Such a boat may be exempt in some states, probably depending on what else she owns, but let’s assume it’s not exempt here.)

Hannah would partly like to keep the boat, because her kids enjoy sailing with her. But it is quite expensive to maintain, draining money she needs for much  more important expenses. So she doesn’t terribly mind losing the boat.

Keeping the Boat

Her bankruptcy lawyer tells Hannah she does have two possible ways to keep the boat. One is under Chapter 7 “straight bankruptcy” and another under Chapter 13 “adjustment of debts.”

She could likely keep the boat by essentially paying for the right to keep it, in a different way with these two options.

Chapter 7 Option for Keeping the Boat

In a Chapter 7 case, if she could come up with around $8,000 she could offer it to the trustee. The trustee would almost certainly accept the money instead of taking the boat. In fact the trustee would likely accept somewhat less because Hannah would be saving the trustee the costs involved in liquidating the boat. The trustee may even allow Hannah to pay off the boat over the course of several months. Then after receiving Hannah’s money, the trustee would distribute it out to her creditors.

Assuming that Hannah doesn’t have ready access to $8,000, either immediately or over the next several months, this is not a very practical option. And even if she could borrow or otherwise raise the money, she’d likely decide that that much effort wasn’t worthwhile. Again, she doesn’t really want the boat anymore.

Chapter 13 Option for Keeping the Boat

Chapter 13 makes hanging onto the boat easier. Hannah would likely have 3 to 5 years to make payments into a Chapter 13 payment plan. Those payments would reflect how much she could afford to pay, and would have to be enough over time to pay at least the $8,000 value of the boat.

So she’d have much more time to pay than under Chapter 7. But she’d be stuck in a bankruptcy case for years, simply to be able to keep something she no longer thinks is wise to keep.

The Best Option Here—the Asset Chapter 7 Case

Hannah decides that simply giving the boat to the Chapter 7 trustee would be the best for her here.

So, with the help of her lawyer she files a Chapter 7 case. A few weeks later she signs over the boat to her assigned trustee. The trustee sells the boat, and after expenses (for the boat broker’s commission, storage fees and such), has a net amount of $7,000.

The trustee is entitled to a fee. It’s generally calculated to be no more than 25% of the first $5,000 distributed, plus 10% of the next $45,000. (See Section 326(a) of the U.S. Bankruptcy Code.) That amounts to a $1,950 fee here, which would come out of the $7,000.

That leaves $5,050 for the creditors. Since Hannah owes no “priority debts,” the $5,050 is divided pro rata among the $80,000 of debts. This means that her creditors would all receive a little more than 6 cents on the dollar.

Although Hannah is losing the boat to her creditors, under her circumstances this is her best option. She gets rid of something that she doesn’t need, finishes her case in a matter of a few months, and gets a fresh financial start by being debt-free.

 

When a Chapter 7 Trustee Doesn’t Liquidate Non-Exempt Property

June 14th, 2017 at 7:00 am

Just because you own something that isn’t exempt does not necessarily mean that your Chapter 7 trustee will liquidate it. Maybe not.


Our last blog post was about the most straightforward kind of no asset” Chapter 7 case. That’s when it’s clear that everything you own is “exempt”—fully protected. The property and exemption schedules that you and your bankruptcy lawyer prepare and file at court show this. Your trustee asks a few confirming questions at the “meeting of creditors” and announces that your case is a “no asset” one. That means that there’s nothing you own that the trustee wants to liquidate and pay its proceeds to your creditors.

But if you do own something that isn’t exempt. What happens then?                                     

The Chapter 7 Trustee’s Task

If you have an asset which isn’t exempt from the trustee’s liquidation, he or she doesn’t necessarily liquidate it. According to the Handbook for Chapter 7 Trustees:

The trustee should consider the likelihood that sufficient funds will be generated to make a meaningful distribution to creditors prior to administering a case as an asset case.

In other words, before liquidating anything the trustee needs to decide whether it’s practical to do so. The trustee needs to consider whether enough money would come from the liquidation for a “meaningful distribution” to your creditors.

Considerations about Whether to Liquidate

The following are some of the considerations for the trustee about whether to liquidate an asset of the debtor:

  1. accessibility—is it readily available or not?
  2. liquidation costs—do those costs eat up a substantial amount of the anticipated proceeds?
  3. marketability—is there a risk that the asset cannot be liquidated for a worthwhile price?
  4. burdensome—does the asset have attributes that make is potentially detrimental to the trustee?
  5. “meaningful distribution”—given the number and nature of your debts, will the creditors receive an amount worth the administrative effort involved?

Examples
 
1. Accessibility:

You own a boat that is worth about a $1,000. It was located 1,000 miles away in a remote area on lakeside land that got foreclosed last year. You have not seen it in two years and so are not even sure if it’s still there. Its accessibility is questionable.

2. Liquidation Costs:

Assume that you’ve had a relative verify that this boat is still in the boat shed on the property. But because of the remote and rustic location, the trustee would have to pay a substantial amount to have an agent retrieve, transport, and sell the boat. Those costs could be more than the boat is worth.

3. Marketability:

Under the same facts the boat is not readily marketable at its present location because of its remoteness. The lake is very small, with only very few other landowners who might be interested in buying the boat. There’s no marina or boat broker for a couple hundred miles, with the the nearest local newspaper nearly as far.

4. Burdensome:

The new owner of the foreclosed property does not want the boat and indeed is threatening to charge storage fees. The boat not only has no net liquidation value, it is turning into a burdensome liability.

5. “Meaningful Distribution:

Even if the facts were different so that a trustee believed the boat could net $800 after some relatively modest costs of sale, most likely the trustee would not bother. The trustee is entitled to a 25% fee, or $200 here, leaving only $600 for the creditors. If, for example, you have any “priority” debts (recent income taxes or child/spousal support arrearage), those would be paid first out of that $600 before your other debts would receive anything. Since you’d have to pay these tax/support debts anyway, there’s no practical benefit to going through all the administrative effort of liquidating the boat and distributing the proceeds. The creditors would not receive a “meaningful distribution”—nothing or close to nothing, in this example.

Next

So what happens next, once the trustee decides not to liquidate your otherwise non-exempt asset? We cover that in our next blog post about “abandonment.”

 

The Trustee in a Consumer Chapter 7 Case

May 8th, 2017 at 7:00 am

Besides your creditors, the main person you need to be careful about in a “straight bankruptcy Chapter 7 case is the trustee. Who’s that? 

 

The Trustee Is a Liquidator, Sometimes

Chapter 7 is sometimes called the “liquidation” kind of bankruptcy. But in most consumer cases no liquidation—the selling of assets—happens. That’s because usually everything the debtor owns is “exempt”—protected from liquidation.

The Chapter 7 trustee is the official who determines if a debtor has any assets that are not exempt. If so, the trustee takes possession of them, sells them, and distributes the proceeds to the creditors.

Information for the Trustee

The main source of information for the trustee about your assets is the paperwork you provide him or her. Most of that is in contained in the documents you and your lawyer prepare and file at the bankruptcy court. You also provide some verifying documents to the trustee directly.

The bankruptcy documents consist of dozens of pages of “schedules” or lists of your creditors and your assets, and answers to many financial questions. You review these carefully with your lawyer, sign them under penalty of perjury, and they’re filed at court.

These documents include a list of the “exemptions” you’re claiming. Those usually show that everything (just about everything) you own is protected from liquidation by the trustee.

The “Meeting of Creditors”

The trustee is in charge of the so-called “meeting with creditors.” It’s called a “meeting of creditors” but in consumer cases often only the trustee, you, and your lawyer attend. It happens about a month after filing your Chapter 7 case. The trustee asks you and your lawyer questions based on the information in the documents filed and otherwise provided. The questions mostly focus on your assets and exemptions you’ve claimed.

This is an important but usually rather informal meeting. It usually lasts about 10 minutes, sometimes shorter. Usually the bankruptcy documents point clearly to the fact that all your assets are exempt. If so, the trustee may (depending on local custom) “declare the case to be a no-asset case.” This means that everything you own is exempt; you have nothing for the trustee to liquidate. You get to keep everything.

Other Trustee Responsibilities

It’s not unusual for the trustee to ask debtors or their attorneys to provide additional information or documents. These are usually to clarify or verify what is in the bankruptcy paperwork. He or she can also investigate independently or through the help of others. For example, if you own something potentially valuable the trustee could have an appropriate expert appraise it to see your valuation is reasonable.

Also, if the trustee sees something suspicious he or she could pursue the matter. At some point the trustee could refer it to the United States Trustee. The U.S. Trustee is the enforcer of the bankruptcy system, and essentially the trustee’s boss. This office usually stays in the background in consumer bankruptcy cases. Part of its job is to oversee compliance with the bankruptcy laws. The U.S. Trustee mostly tends to get involved if a debtor has tried to hide significant assets.

These kinds of problems almost never happen as long as you are honest with your lawyer. Be candid and thorough with him or her so that potential problems can be avoided. There are usually workable solutions.

Is the Trustee Your Adversary?

Yes, it’s the Chapter 7 trustee’s job to represent your creditors. Mostly he or she does that by finding non-exempt assets to liquidate and distribute to the creditors. And the trustee can refer you to the U.S. Trustee if he or she encounters any serious bad behavior. So the trustee is legally your adversary.

But most of the time nothing bad happens. Your only contact with the trustee is often nothing more than a reasonably friendly “meeting of creditors” that’s over before you know it.

 

The Practicalities of “Preferences”

April 12th, 2017 at 7:00 am

Preferences can be dangerous but can also present potential opportunities. So although not all that common, they’re worth knowing about.

A “Preference” in Bankruptcy

In our last blog post we explained what a “preference” is in bankruptcy. It’s what it sounds like it would be. It’s a payment you make to a creditor before filing bankruptcy in preference to your other creditors. Then, after you file your bankruptcy case, under certain circumstances your bankruptcy trustee has the power to require the creditor to return the money you paid.

However, that money is not returned to you but instead to your “bankruptcy estate.” That’s the term for the pool of all your assets as of the moment you file your bankruptcy case. To the extent those assets are not “exempt,” or protected, the trustee distributes those assets among your creditors. Any money returned by a creditor as a preference is part of that pool of potentially distributed assets.

We said last time that a preference can be good or bad for a person filing bankruptcy. We’ll get into both kinds starting with our next blog post. But first today we get into a couple important practicalities about preferences.

Putting Preferences into Perspective

It’s important to realize that most consumer bankruptcy cases do not involve any preference payments. Or at least do not involve the trustee making a creditor give back such payments.

There are at least 3 reasons for that.

First, there are timing conditions for a payment to a creditor to qualify as a preference. For most creditors the payment must be made within the 90-day period before the bankruptcy filing. Lots of people who file bankruptcy aren’t paying a lot to their creditors in the last few months before filing.

Second, bankruptcy trustees will usually not pursue a preference if the amount of payment(s) is relatively small. How small depends on the circumstances. Most consumer bankruptcy cases are “no-asset” ones—all of the debtor’s assets are exempt, protected.  If the trustee isn’t already getting other assets to distribute, the preference amount has to be surprisingly large to make the trustee’s time and expense worthwhile. Again, it depends on the circumstances. But usually it takes a thousand dollars or more in preference payment(s) if the trustee isn’t already pursuing other assets.

Third, even when the amount of the preference seems large enough, certain creditors may not be worth the trustee’s effort. The creditor may have gone out of business in the meantime, or may not have any meaningful assets. Especially if the trustee has to spend attorney fees to try to make the creditor pay and there’s a big risk it won’t, the trustee she may not be willing to try to chase down the preference. This is especially true if there are no other unprotected assets from which the trustee could pay its collection expenses.

Voluntary and Involuntary Preference Payments

As a debtor you can make a preferential payment either voluntarily or involuntarily. You could pay a creditor (before you file bankruptcy) by doing so voluntarily, intentionally. Or you could be made to pay involuntarily through a garnishment of wages or of a bank account, or some other aggressive method. Either kind of payment could be a preference, as long as all the other conditions apply.

If a payment was forced out of you, such as by garnishment, you’d welcome that payment being considered a preference. You may like the trustee making that aggressive creditor cough up that money. That would especially be true if the trustee turned around and paid that money where you’d prefer it to go.

If you paid a creditor voluntarily you may not care whether your trustee makes that creditor “return” the money. But if that creditor happens to be someone you have more than a debtor-creditor relationship with, you may really care. Having the trustee force your relative or friend to give up money you paid months ago could really hurt. It could hurt both your creditor relative/friend AND you.

In our next blog post we’ll get into these bad preferences, and how to stay clear of them.

 

Adversary Proceedings by the Trustee

March 6th, 2017 at 8:00 am

Usually it’s not hard to avoid getting into a dispute with your trustee. But you need to know the law and follow it.

 

Last time we introduced the term “adversary proceedings,” essentially the name for lawsuits in bankruptcy court. We focused on adversary proceedings brought by creditors against debtors when challenging the discharge of their debts. Today we turn to possible adversary proceedings by trustees.

We have to keep emphasizing that most consumer bankruptcy cases involve NO adversary proceeding at all.  Most cases go generally as expected, that is, assuming that the debtor is represented by an experienced bankruptcy lawyer. This also assumes that the debtor is honest and thorough with the lawyer so that any potential issues can be nipped in the bud.

But disputes sometimes do arise. So it’s helpful to have some idea what those might be and how they are resolved.

The Trustee in Bankruptcy

Essentially, the trustee in a Chapter 7 or Chapter 13 bankruptcy stands in for the creditors. He or she is a person given certain powers by the bankruptcy court to act on behalf of the creditors. The practical idea is that it’s simply not very efficient for every creditor to deal with the debtor directly. Once a person has to file bankruptcy, there’s usually not much in assets to fight about. Also, the debtor is protected from creditors, but still has to follow the laws of bankruptcy. So the trustee is empowered in certain ways to enforce those laws.

One way bankruptcy trustees enforce bankruptcy laws is through adversary proceedings against the debtor.  

Trustee-Filed Adversary Proceedings

Here’s a list of the main kinds of adversary proceedings a bankruptcy trustee could bring:

  • raising a concern that the debtor did not complete the bankruptcy documents accurately but rather intentionally misrepresented the facts (see Section 521 of the U. S. Bankruptcy Code.)
  • asking for the bankruptcy court to dismiss the case if paperwork is not filed on time
  • asking for case dismissal if the debtor misses a court date without a good reason
  • getting court authority to collect money back from a creditor who received funds or property from a debtor (see Section 547)
  • undoing a transfer of real property or other assets that the debtor gave away or sold before filing bankruptcy (see Section 548)

We’ll talk about these more in upcoming blog posts.

The United States Trustee

There is another player in the bankruptcy system which can also bring adversary proceedings, the U.S. Trustee. Unlike the “chapter trustees” above, this is an office of the federal government. It has some major administrative and enforcement roles in the bankruptcy system. The U.S. Trustee’s office supervises the “chapter trustees” and directly oversees bankruptcy cases as well.

The U.S. Trustee mostly files adversary proceedings for two reasons:

  • to force the debtor to move from Chapter 7 to Chapter 13 if the U.S. Trustee believes that the filing of the bankruptcy petition was done in “bad faith”
  • to dismiss the case if the U.S. Trustee believes the filing of any bankruptcy petition was done to “abuse” the bankruptcy system

We’ll talk about these more in upcoming blog posts.

Conclusion

We realize that hearing about these various ways that the Chapter 7 and 13 trustees and the U.S. Trustee can bring adversary proceedings against you can be unsettling. But most of the time it’s not hard to avoid these kinds of disputes. When driving down the freeway we don’t have to worry about the highway patrol if you’re not speeding. But it is important to know the speed limit and stay below it.

In bankruptcy it’s crucial to know the law by having a lawyer in your corner explaining it to you. That way you can avoid disputes from arising. And in the relatively rare times when a dispute does happen, you have the necessary help to resolve it quickly.

 

The Bankruptcy Judge, U.S. Trustee, and Chapter 7 and 13 Trustees

January 16th, 2017 at 8:00 am

Your bankruptcy case makes more sense if you know the roles of the people involved, including the judge and the various trustees. 


The Bankruptcy Judge

A judge is assigned to each bankruptcy case. However, in both Chapter 7 and Chapter 13 cases you will not likely ever see him or her.

In a very straightforward Chapter 7 case, the judge actually has very little to do. He or she tends to get actively involved only if a dispute needs resolution.

In a Chapter 13 case, the judge is much more directly involved. The judge oversees the approval of your payment plan and resolves any disagreements about it. There are often other developments during the course of your case that the judge would need to adjudicate.

Bankruptcy judges are appointed to terms of 14 years. This is unlike regular federal district court judges who are appointed for life. Bankruptcy judges are technically just “judicial officers of the United States district court.” 

The U.S. Trustee

This is someone else who generally flies under the radar in most bankruptcy cases. This office is the mostly behind-the-scene enforcer within the bankruptcy system. Its website describes its role:

The United States Trustee Program is a component of the Department of Justice that seeks to promote the efficiency and protect the integrity of the Federal bankruptcy system.  To further the public interest in the just, speedy and economical resolution of cases filed under the Bankruptcy Code, the Program monitors the conduct of bankruptcy parties and private estate trustees, oversees related administrative functions, and acts to ensure compliance with applicable laws and procedures.  It also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.

Accordingly, an important job of your bankruptcy lawyer is to avoid you ever needing to hear from the U.S. Trustee!

The Chapter 7 Trustee

You will personally meet your trustee if you are filing a Chapter 7 case. That meeting—at the so-called “meeting of creditors”–will usually not last for more than 5 or 10 minutes.

The Chapter 7 trustee’s job is mostly to determine if you have any assets which are not “exempt”. This means not protected from your creditors. The trustee does this partly by presiding at your “meeting of creditors” about a month after you file your case. In most cases, everything you own IS “exempt.” So the trustee usually makes that determination, which largely ends his or her role in the case.

In the minority of cases in which some of your assets are not “exempt,” your Chapter 7 trustee will have a right to take possession of them, sell them, and distribute the sale proceeds to the creditors. This distribution is based on a schedule of payment priorities among the different legal categories of your creditors.

A Chapter 7 trustee is assigned to your case by the U.S. Trustee from a “panel” of local Chapter 7 trustees. Some trustees in that panel may be more aggressive about pursuing debtors’ assets than others. Your lawyer theoretically cannot influence which trustee you get, but there sometimes are tricks of the trade that can help.

The Chapter 13 Trustee

This trustee is closely involved in your case from its beginning to its end. Because there is usually only one “standing” Chapter 13 trustee assigned to any particular geographic area, your attorney will know in advance who it will be (unlike with Chapter 7 trustees).

The Chapter 13 trustee is usually assisted by a staff lawyer or two and a number of other employees. These people review the Chapter 13 payment plan you and your lawyer propose. The trustee or his or her attorney presides at your “meeting of creditors.” The trustee may raise objections to your payment plan with the bankruptcy judge.

Then once the judge approves a plan, the trustee receives your plan payments and distributes them to the creditors as designated under your plan. The trustee can also file motions at court if you do not make payments as required by your plan. He or she can raise other concerns with the court.

The trustee also tells the court when you have successfully completed all your plan requirements. Then the court can discharge (write off) your remaining debts and close your case.

The Chapter 13 trustee has a number of different roles, some of which are partly inconsistent. His or her task is to maximize how much you pay your creditors but at the same time genuinely wants you to complete your case successfully and to some degree may work with you to that end. Different Chapter 13 trustees juggle these conflicting roles differently. So talk with your lawyer about when you should treat your own trustee as a friend or as a foe.

 

Recovered Assets from “Fraudulent Transfers”

December 5th, 2016 at 8:00 am

Which assets that you sell or give away before filing bankruptcy will be a problem, and which won’t?

 

“Fraudulent Transfers”

Our last blog post explained why the bankruptcy system may be interested in what you sold or gave away before filing bankruptcy. It’s about you not being allowed to avoid paying creditors by hiding assets. So, assets you sold or gave away within 2 years before filing bankruptcy might be subject to recovery by your trustee for the benefit of your creditors.

We ended the last blog post by emphasizing this only happens in certain circumstances. Today we get into those circumstances.

Selling and Giving Away Assets Is Often Fine

Let’s be practical and sensible about “fraudulent transfers.”

In many circumstances it’s not a problem to sell some stuff you own during the period before filing bankruptcy. It’s perfectly fine to sell anything you own for sensible purposes. For example, it’s no problem to sell something you own to raise money to pay creditors or living expenses.

You just need to get paid a reasonable amount in the transaction. You must be paid “a reasonable equivalent value in exchange” for what you sold. (Section 548(a)(1)(B)(i) of the Bankruptcy Code) That means garage sale prices in a garage sale, reasonably close to blue book value for a vehicle, etc.

It’s even okay to give away assets, although that’s a bit trickier. You can give away stuff that effectively has no “reasonable equivalent value in exchange.” That means that the only practical way to get rid of it is to give it away.

If you’re giving away to charity, you have more flexibility. As long as you are giving to “a qualified religious or charitable entity or organization” you can give assets worth up to 15% of your gross income that year. (Section 548(a)(2)(A)) You can even give more “if the transfer was consistent with the practices of the debtor in making charitable contributions.” (Section 548(a)(2)(B))

So when does selling and giving away assets turn into a fraudulent transfer?

Actually Fraudulent “Fraudulent Transfers”

You can’t sell or give away assets “with actual intent to hinder, delay, or defraud” your creditors. (Section 548(a)(1)(A)) You can’t purposely hide your assets from your creditors by getting rid of the assets. Call this intentionally fraudulent transfer. These are relatively rare, in part because such “actual intent” is hard to prove.

NOT Actually Fraudulent “Fraudulent Transfers”

Even without any such fraudulent intent, a constructive “fraudulent transfer” can happen. It usually takes two conditions:

  • You get “less than a reasonably equivalent value in exchange for such transfer or obligation.” There isn’t necessarily any evidence that your sale or gift was done to hide the asset from your creditors. But you didn’t get paid what the asset being transferred was worth. (Section 548(a)(1)(B)(i))
  • You are insolvent at the time of this transfer. Or the transfer makes you insolvent. (Section 548(a)(1)(B)(ii)(I)) “Insolvent” means the value of all your debts is more than the value of all your assets. (Exclude “exempt” assets from this calculation—assets that are protected from your creditors.) (Section 101(32)(A))

The point is that if you shouldn’t be selling or giving away an asset without getting paid enough for it—in money or in anything else of value—when you’re in the red. You shouldn’t be in effect giving away assets that you should instead pay to your creditors. And if you do and within two years thereafter you file bankruptcy, your trustee could try to undo that transfer, sell that asset, and distribute the sale proceeds among your creditors.

(There are 3 other very specific circumstances that can result in a fraudulent transfer. But those are rare and beyond what we can cover in this blog post. ((Section 548(a)(1)(B)(ii)(II, III and IV))

Conclusion

Fraudulent transfers are one of the more complicated concepts in bankruptcy. These last two blog posts have just given a very basic overview. One of the key benefits of working with highly competent bankruptcy lawyer is that these kinds of potential problems can be found, discussed, and resolved to your advantage.

 

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