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What you should know about the trustee in bankruptcy

watchdogWhen the topic of bankruptcy in New York comes up, you hear a lot about things like Chapter 7, Chapter 13, the “means test,” financial statements and a bunch of other important terms.

But what do you know about the trustee and his or her role in a bankruptcy case?

It’s important to understand what the trustee is and what he/she does since they have the ability to significantly affect your bankruptcy case.

At Rosenberg Musso & Weiner we work with trustees from all angles.  We represent:

  • Trustees in some cases in actions against creditors
  • Creditors in actions against them by trustees in other cases
  • And of course, many clients who are debtors who must interact with trustees.

As a result, we have an excellent understanding of everyone’s perspectives, strategies and even personalities, and we are able to help our clients in a whole range of situations.

What is a trustee?

Chapter 7 Bankruptcy
For a Chapter 7 bankruptcy case, a trustee is usually a regular bankruptcy lawyer who is qualified to be a member on the panel of trustees in a given district.  When a new bankruptcy case is filed, the office of the U.S. Trustee selects a member of the panel at random and assigns him or her to be the trustee for the new case.

Whenever a new bankruptcy case is filed (e.g., Chapter 7, Chapter 11, Chapter 13), a copy of the debtor’s petition is sent to the U.S. Trustee’s Office for that district.  The office of the U.S. Trustee then assigns one if its trustees to that case.

Chapter 13 Bankruptcy
For Chapter 13 bankruptcy cases, there are one or more designated trustees for each district who serve as the trustee for all of the Chapter 13 bankruptcy cases in that district.  These are called “standing trustees.”  They are regular, private practice lawyers who have been selected to serve as Chapter 13 trustees for their district.

In New York, there is only one Chapter 13 trustee for the Southern District of New York (which covers Manhattan and the Bronx as well as Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan counties), and there are two Chapter 13 trustees for the Eastern District of New York (which covers Kings (aka Brooklyn), Nassau, Queens, Richmond, and Suffolk counties).

What is a trustee’s role?

The trustee is like a watchdog for the case and has the ability to bring actions against (i.e., sue) both the debtor and the creditor in an effort to protect the interests of the estate.  The trustee’s role is a little different depending on the kind of bankruptcy.

Chapter 7

A trustee’s main responsibilities in a Chapter 7 bankruptcy case are to:

  1. Investigate the financial affairs of the debtor
  2. Liquidate the assets of the bankruptcy estate.  In other words, collect the the non-exempt property and assets of the debtor and convert them into money which is used to pay off the creditors.
  3. Examine and, if appropriate, object to the claims of creditors
  4. If necessary, object to the discharge of the debtor from bankruptcy

Also, when a debtor files for Chapter 7 bankruptcy, the trustee reviews the debtor’s calculations for the “means test” to make sure that the debtor is eligible and there is no “presumption of abuse.”  If the debtor is on or close to the borderline (i.e., its income is close to the median income for the state), then the trustee looks at the other facts in the case and can conduct its own investigation to determine if there is an abuse by the debtor.  The trustee then can decide to bring an action against the debtor disputing the debtor’s eligibility to file for Chapter 7.  Or, the trustee can let the debtor know that it will not bring any action and will allow the debtor proceed with its Chapter 7 filing.

Note: In New York, if the trustee believes there may be abuse, he or she typically refers the matter to the office of the U.S. Trustee rather than bring the action him or herself.

Chapter 13

Unlike a Chapter 7 bankruptcy where the trustee takes assets and converts them into money, in a Chapter 13 bankruptcy the trustee has no right to take and sell the debtor’s property.  Instead the trustee’s role is to oversee the repayment plan, collect payments from the debtor and distribute them to creditors in an orderly way.

Additionally, the trustee can seek to dismiss the debtor’s case, for example, if the debtor is unable to continue making payments, or if the debtor loses his or her job and source of income.

Creditor Actions
A trustee can also bring actions against creditors to recover money for the debtor’s estate.  Usually, these are in the form of “preference” or “fraudulent conveyance” actions.

One of the purposes of the bankruptcy process is to make sure that all creditors are treated fairly and equally, and that no one creditor gets to push to the head of the line.  If one creditor gets money from the debtor unfairly, that means less money for the other creditors.  It is the trustee’s duty to bring actions against (i.e., sue) any creditors that unfairly received money, and try to recover that money for the debtor’s estate.

Working with trustees
Whether you’re a debtor or a creditor in a bankruptcy case in New York, you need to be aware of the trustee in the case.  It also helps to have a lawyer who is familiar with trustees–who they are, how they function, what their goals and incentives are–since trustees have the power to affect outcomes in many ways.

For more information about bankruptcy trustee actions as well as about bankruptcy in New York, Manhattan, Brooklyn, Queens and Suffolk County, Long Island, please feel free to contact us for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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