Chapter 7 bankruptcy is a liquidation legal proceeding. Upon filing of the bankruptcy petition, the debtor turns over all non-exempt property to the court-appointed bankruptcy trustee, who then converts the property to cash to make a distribution to creditors. Generally, most assets held by the average debtor are considered to be exempt. In those cases, the trustee files a report of no distribution with the Court to indicate there will be no payment to the creditors. The debtor is required to attend a Section 341 hearing which is commonly called the first meeting of the creditors. The bankruptcy trustee presides at this hearing and the debtor is required to answer specific questions outlined in the U.S. Bankruptcy Code. Creditors of the debtor are allowed the opportunity to ask questions of the debtor regarding the statements and schedules filed by the debtor with the Court. Usually after 60 days from the date of the 341 hearing the debtor will receive a discharge which effectively "wipes out" all dischargeable debts.
In order to file a bankruptcy, the debtor must reside in the location of filing within the greater part of 6 months (91 days). The debtor maybe an individual, married couple, corporation, partnership or trust. The debtor may not have been granted a Chapter 7 discharge within the previous 6 years. The debtor must not have had a previous bankruptcy dismissed for cause within the last 180 days.
The most common reasons for filing a Chapter 7 (liquidation) bankruptcy are: divorces with extensive credit, extended period of unemployment, large medical expenses, extended period of disability, over extended consumer credit, large amount of unexpected expenses and business losses.
After the bankruptcy petition is filed, the United States Trustee appoints as trustee a disinterested person who is a member of a panel of Chapter7 trustees ("panel trustee") to serve as an interim trustee. The interim trustee serves until a permanent trustee is elected or designated at the Section 341 hearing. If a trustee is not elected or designated at the Section 341 hearing, the interim trustee will then serve as the permanent trustee. In almost every case, the interim trustee will continue to serve as the permanent trustee. A Panel Trustee is appointed in each Chapter 7 case to review the bankruptcy petition and schedules filed with the Court and to determine if the debtor has any non-exempt assets available for distribution to creditors. The Panel Trustee is required to be independent and works primarily for the benefit of the debtor's unsecured creditors.
Chapter 7 Trustees (also known as panel trustees) are not government employees. They are private citizens appointed and supervised by the Office of the U.S. Trustee (a division of the U.S. Department of Justice) to administer bankruptcy cases under chapter 7 of the U.S. Bankruptcy Code. Many chapter 7 trustees are also attorneys or accountants who continue to practice their profession after appointment to the panel.
Each Panel Trustee must pass a FBI background check and is required to post a bond in each case that he/she is appointed. Most Panel Trustees qualify for a blanket bond which covers them in each of the cases that they are appointed.
There are approximately 1,000 Chapter 7 Trustees who are currently receiving new cases, most of whom are NABT members. Chapter 7 Trustees collectively administer over one million cases annually.
The United States Trustee usually institutes a program at the local level which insures that a Panel Trustee is selected on a random basis to handle all Chapter 7 bankruptcy cases. The Panel Trustee is selected at random to insure that debtors or their attorneys do not "trustee shop"for a specific Panel Trustee. It also assures a Panel Trustee that he/she has an equal chance to get appointed to a case that may have significant assets to administer. If the Panel Trustee has a conflict in a specific case, he/she may withdraw by giving notice to the United State Trustee. Panel Trustee case loads vary between several hundred cases a year to several thousand depending on the location of the Panel Trustee.
Although their obligations are many and varied, the Chapter 7 Trustees’ primary goal is to liquidate assets for the benefit of creditors where possible. Chapter 7 Trustees distribute approximately $1.5 billion each year to creditors. In approximately 90% of the Chapter 7 bankruptcy cases filed, there are no assets available for liquidation, either because assets are exempt (protected) by debtors or liened by secured creditors. In all cases, Chapter 7 Trustees must investigate the debtor’s affairs, examine the debtor under oath, and submit reports to the bankruptcy court and Office of the U.S. Trustee.
The Panel Trustee will review the debtor's petition and schedules after they have been filed with the Court. The Panel Trustee may request additional information from the debtor to review in conjunction with the debtor's petition and schedules. The Panel Trustee specifically reviews the debtor's exemption schedules to determine whether the debtor has properly followed the state or federal exemption laws. The Panel Trustee formulates questions to ask the debtor at the Section 341 hearing regarding the debtor's assets, liabilities, income and expenses. The Panel Trustee serves as the hearing officer for the 341 hearing. Each debtor is sworn and examined by the Panel Trustee and the creditors are allowed the opportunity to ask questions which is moderated by the Panel Trustee. After the Section 341 hearing, the Panel Trustee will object to exemptions that have been improperly claimed. The Panel Trustee must file an objection to the claimed exemptions within 30 days of the Section 341 hearing. The Panel Trustee will seek turnover of assets held by the debtor or other parties and will arrange for their eventual sale. The Panel Trustee may also seek to recover assets conveyed by the debtor prior to the filing of the bankruptcy. This could include payments made by the debtor to its creditors within 90 days of the bankruptcy filing or 1 year if the payments were made to related parties of the debtor. The Panel Trustee will cause a notice to be given to all creditors to file their claims with the Bankruptcy Court. The Panel Trustee will then pay creditors according to the priority level they have been given by the Trustee. After all funds held by the Panel Trustee are distributed, the Trustee will seek approval of the Court to close the bankruptcy case.
In an individual case, the Panel Trustee will administer all assets that are not exempt. These assets could include: equity in the debtor's vehicles (above the exemption), equity in the debtor's residence (above the homestead exemption), rental property, timeshares, raw land, business assets, inventory, accounts receivable and lawsuits (i.e. personal injury lawsuits pending or potential claims). In corporate, partnerships or trust bankruptcies, there are no exemptions afforded the debtor. In these cases, the Panel Trustee usually administers all property of the debtor. The Panel Trustee may abandon property that has little or no value or that is over secured by a lienholder. An abandonment is completed after the Panel Trustee gives notice to creditors of the estate and no objections are filed. Business assets can include: real property, machinery and equipment, deposits, bank accounts, accounts receivable, inventory, patents and other intangibles. In some instances, the Panel Trustee may determine it to be in the best interest of creditors for the Trustee to continue operating a business for eventual sale. The Panel Trustee must seek Court approval to operate such a business and must file reports with the Court indicating the progress of the business operation. The Panel Trustee would only operate a business if he determines in his best business judgement that the business would lose significant value if it were closed. Operating business typically would include: restaurants, bars, leased property, nightclubs, etc.
Panel Trustees handle various assets that are eventually sold. Panel Trustees are allowed to sell assets of the estate after notice is given to all creditors of the debtor. Panel Trustees are not generally required to provide notice of bankruptcy sales to the general public. For sales of business property, the Panel Trustee will usually appoint an auctioneer to handle the administration and sale of property. Typically the auctioneer provides notice to the general public of these sales. Panel Trustees generally sell real property at a bankruptcy court sanctioned sale. A Panel Trustee may hire a real estate broker to market the property and to bring forward an original bid. When a potential bid is accepted by the Trustee, he will notice the sale through the Bankruptcy Court for a specific hearing date before a Bankruptcy Court Judge. At this sale, the Judge will ask for other competitive bidders and will sell the property to the highest and best bidders. Some Panel Trustees sell property at sales held in their offices once notice is given to the creditors or the estate. Successful bidders at a bankruptcy sale are required to complete the sale and pay the proceeds to the Panel Trustee. Bidders who do not close their sales may be liable for the full amount of the sale if the Trustee cannot find another buyer. Bidders must not collude together in order to rig a sale. This could be a violation of federal bankruptcy and criminal laws.
The Panel Trustee reviews the claims that are filed with the Court to determine if they should be allowed at the priority levels they have been claimed. If the Panel Trustee believes a claim is incorrect, he will file an objection to the claim and notify the creditor of his objection. If the creditor does not respond to the objection filed by the Trustee, the Panel Trustee will obtain an order from the Court allowing his/her objection. If the Creditor requests a hearing, the Court will determine whether the Panel Trustee's objection will stand or not. The Panel Trustee will pay creditors based upon their priority. Administrative expenses under Chapter 7 are paid first. This would include the Trustee, the Trustee's attorney, the Trustee's accountant, the Trustee's appraiser, the Trustee's auctioneer and Court costs. Chapter 11 administrative claims are paid next. Other claims are then paid in their respective order as follows: wage claims to the extent of $4,000; contributions to employment benefit plans; customer deposits to the extent of $1,800; claims for debts due a spouse for alimony or child support; secured taxes; priority taxes and unsecured claims. Any excess funds remaining would be returned to the debtor.
Panel Trustees are paid $60 for each Chapter 7 case they administer. In addition to the standard fee, Panel Trustees are compensated on an incentive commission bases. Panel Trustees are compensated on a commission basis in order to maximize the dollar amount of assets brought into the estate by the Trustee. The commission is determined on the total disbursements made by the Panel Trustee to interested parties of the estate, excluding any payment to the debtor. The commission rate is : 25% on the first $5,000 distributed; 10% on the next $45,000 distributed, 5% on the next $955,000 and 3% for every dollar distributed in excess of $1,000,000. The commissions earned by the Trustee are reviewed by the Court, when requested, to determine if the fees are reasonable. Panel Trustees are usually awarded their full commission compensation since they handle hundreds of cases in which a great deal of work may be done and the only fee earned in $60.
Many bankruptcy cases have complex assets which require litigation to resolve. In these cases, the Panel Trustee must hire an attorney to handle the litigation on behalf of the estate. As in many situations which involve litigation, the time period necessary to resolve the legal issues can take several years or more.
Panel Trustees are the most qualified persons to handle bankruptcy cases and administer assets of the estate. Panel Trustees are independent, dedicated professionals who put their personal assets at risk with each bankruptcy case they administer. Panel Trustees are most familiar with the bankruptcy process and have encountered almost every conceivable issue relating to the disposition of estate assets and recovering assets for the estate. Panel Trustees are most experienced at being placed in unfamiliar situations with complete strangers (often in troublesome situations) in order to effectively accumulate all assets, books and records and vital information of the estate. Due to their vast experience, Panel Trustees make excellent Chapter 11 Trustees, court appointed examiners and court appointed receivers.