Whether you are filing for a simple chapter 7 bankruptcy or a more complex chapter 13 case, you will need to meet and interact with the bankruptcy trustee. The trustee assigned to your case is simply an attorney retained by the court to administer bankruptcy cases and ensure the creditors rights are protected. To give you a better understanding of what to expect from the bankruptcy trustee, you need to understand his/her financial motivations.
How the Bankruptcy Trustee is Compensated
The trustee is paid a small flat hourly rate to administer bankruptcy cases for the court. To make up for the rather small amount of fixed payment, he or she is also given a percentage of funds distributed to creditors involved in the case. This means the trustee is out to ensure creditors get money to which they are entitled in bankruptcy, and not necessarily looking out for your best interests.
Chapter 7 vs. Chapter 13 Cases
Depending on the type of case, the trustee will be looking at one of two things to determine if there is a way to get more money distributed to creditors.
Chapter 7
In a chapter 7 case, the trustee can only get money distributed to creditors by liquidating the bankruptcy petitioners non-exempt assets. In practice, this is not an easy thing to do in most cases, because common assets of value are protected by exemption. Those assets that are NOT protected are usually either too difficult to sell, or worth too little to bother. The trustee will not spend a lot of time trying to liquidate these things, and will usually just "abandon" most property, meaning nothing happens to it.
For those assets which are valuable, such as a piece of real estate or a car, exemptions usually cover the petitioners equity enough that the funds raised would be nothing, or too small to bother.
Now, in those cases where the person filing for chapter 7 has significant non-exempt equity, then the trustee will likely want to sell it, pay off some of the debt, and take a portion of the proceeds for him/herself. This usually occurs when the bankruptcy petitioner owns a second home with a lot of equity, owns a boat outright, off road or vacation vehicles, or a second car that doesn't have a loan against it. In cases like this, a chapter 13 bankruptcy would probably be a better choice.
Chapter 13
Unlike a chapter 7, the trustee has no power to liquidate assets in a chapter 13 bankruptcy. So what do they look for? In a chapter 13 case, the amount of money distributed to creditors is determined by the final approved payment plan. The monthly payment, generally speaking, is based on the amount of monthly disposable income available after all of the petitioners monthly expenses are considered. The trustee is going to try to find ways to make the petitioner pay more each month, so that more debt is repaid over the course of the plan.
This means that he or she will be looking at your monthly expenses, to find out if you are overstating anything to get a reduced payment.
The End Result
In either case, chapter 7 or chapter 13, the trustee's job is to get more money for your creditors, and that means getting more money out of you. The good news is, bankruptcy laws heavily favor debtors so the trustee is often fighting an uphill battle. Even so, it's important to understand that the trustee is not on your side, so be aware of what property or expenses may be vulnerable, and have a plan to cover it.
This is one of the best explanations about bankruptcy I've read. I've been considering a chapter 7, but I've got some property that I was concerned about. I knew the trustee was out to sell stuff, but didn't understand exactly how it worked.
ReplyDeleteThanks for the post and the link too. That guide is really helpful.