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What is the Role of a “Trustee” in a Bankruptcy Proceeding?

A trustee is the representative of the estate in a bankruptcy case and has the capacity to sue and be sued. Trustee is the term used for several different roles in the bankruptcy process.

Eligibility to Serve as Trustee

A person may serve as trustee only if the person is either:

  1. an individual who is competent to perform the duties of trustee and, in a case under Chapter 7, 12 or 13, resides in or has an office in the judicial district within which the case is pending or in any judicial district adjacent to the district; or
  2. a corporation authorized by such corporation’s charter or bylaws to act as trustee and, in a case under Chapter 7, 12 or 13, having an office in at least one of the districts.

A person who has served as an examiner in the case may not serve as the trustee in the case. If necessary, the United States trustee for the judicial district in which the case is pending is eligible to serve as trustee in the case.

Chapter 7 Trustee

Trustees are appointed in every Chapter 7 case to investigate the assets of the debtor, hold initial meetings of creditors, conduct bankruptcy sales, investigate claims and pay creditors. The trustee’s role is to determine whether there are assets to liquidate; to review claims of exemption and the debtor’s entitlement to a discharge. The Chapter 7 trustee is appointed by the U.S. Trustee, who oversees the trustee’s performance. The trustee can file objections to claims of exemption or oppose the debtor’s discharge, but the trustee doesn’t decide those questions. The judge decides disputed questions. Trustees are paid in part from the filing fee paid to the court at the commencement of the case. Any compensation they receive above that is a fee based on the money they handle as part of the estate.

Chapter 12 Trustee

The Chapter 12 trustee’s primary responsibility is to act as a disbursing agent, receiving payments from debtors and making distributions to creditors. The debtor’s plan of repayment, which must be approved by the court, provides for payments of fixed amounts to the trustee on a regular basis. The trustee then distributes the funds to creditors according to the terms of the plan. The Chapter 12 trustee attends the meeting of creditors along with the debtor. If the plan is confirmed by the bankruptcy judge, the trustee commences distribution of the funds the trustee has received from the debtor. If the plan is not confirmed, the funds paid to the trustee are returned to the debtor after deducting the trustee’s percentage fee and any unpaid claim allowed for administrative expenses.

Chapter 13 Trustee

The Chapter 13 trustee is a private individual appointed by the U.S. Trustee. The Chapter 13 trustee serves the same review function as a Chapter 7 trustee. The Chapter 13 trustee also serves as the disbursing agent for payments made by the debtor into the plan. One Chapter 13 trustee serves all the cases in his/her division or district. The trustee gets a small percentage of the funds that flow through the Chapter 13 case. That percentage is fixed by the U.S. Trustee after review of the Chapter 13 trustee’s operating expenses.

United States Trustee

The U.S. Trustee is a government employee whose job it is to appoint and oversee the Chapter 7 and Chapter 13 trustees. The U.S. Trustee has standing to appear before the court as an interested party. The U.S. Trustees are sometimes charged with reviewing Chapter 7 cases for substantial abuse or denial of discharge. They also take an oversight role in Chapter 11 cases, especially where there is no creditors committee.

Trustee’s Bond

Before beginning any official duties, the trustee must file a bond in favor of the United States that is conditioned on the faithful performance of the trustee’s official duties. The U.S. Trustee is to determine the amount of bond required as well as the sufficiency of the surety on the bond. A trustee is not liable personally or on a trustee’s bond in favor of the United States for any penalty or forfeiture incurred by the debtor. A proceeding on a trustee’s bond may not be commenced after two years after the date on which the trustee was discharged.

Removal of Trustee or Examiner

A trustee, other than the U.S. Trustee, or examiner may be removed for cause after notice and a hearing. If the court removes a trustee or examiner from a case, that trustee or examiner will be removed from all other cases in which the trustee or examiner is serving unless the court orders otherwise.

Limitation on Compensation

The court may allow reasonable compensation for the trustee’s services, payable after the trustee renders the services. If more than one person serves as trustee in the case, the aggregate compensation may not exceed the maximum compensation for a single trustee. The court may deny allowance of compensation for services or reimbursement of expenses of the trustee if the trustee failed to make diligent inquiry into facts that would permit denial of allowance.

Employment of Professional Persons

The trustee, with the court’s approval, may employ attorneys, accountants, appraisers, auctioneers or other professional persons who do not hold or represent an interest adverse to the estate and that are disinterested persons to represent or assist the trustee in carrying out the trustee’s duties. The court may authorize the trustee to act as attorney or accountant for the estate if it would be in the best interest of the estate.

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