In Minnesota, you have a panel of Chapter 7 Trustees that serve a term of one year. They must be approved to be on the chapter 7 panel each and every year. To be on the panel of Chapter 7 Trustees in Minnesota, you typically must apply to be on the panel and go through a series of interviews and back ground checks with the US Trustee’s Office.
Typically, the panel of Minnesota Chapter 7 Trustees come from Minnesota lawyers who apply to be on the panel of Minnesota trustees. Often, these are local lawyers who also have other areas of law they practice in. For example, a Chapter 7 Trustee might practice family law or criminal defense in Maple Grove, Minnesota too. It is also not unusual for a panel Chapter 7 Trustee to also practice bankruptcy law and File Chapter 7 Bankruptcy cases that are brought before other chapter 7 trustees.
As noted above, these are not lifetime appointments. A panel chapter 7 trustee must be approved for 1 year terms every year to remain a Chapter 7 Trustee. There is a strict code of conduct all Chapter 7 Trustee’s must abide by. It’s found in the chapter 7 trustee handbook and can be found at http://www.justice.gov .
Not only can Chapter 7 Trustees be denied a renewal term but they can also be removed for cause under Bankruptcy Code Section 324(a). Who has standing to bring this motion is often irrelevant since the court has the authority to bring it’s own motion to have the chapter 7 trustee removed for cause under 324(a).
Chapter 7 trustees have a number of duties that they must fulfill. Here are some of the more common duties of a chapter 7 trustee:
What does this mean in English? The filing of a Chapter 7 Bankruptcy case in Minnesota creates a bankruptcy estate. The bankruptcy estate owns all assets of the bankruptcy estate. The chapter 7 debtor has the opportunity to exempt certain assets of the bankruptcy estate. The trustee has 30 days from the date of the first meeting of creditors to object to debtor’s exemptions. If the trustee does not object to debtor’s exemptions, on the 31st day after the meeting of creditors, debtor owns the exempted property once again.
If debtor was not able to exempt an asset or if trustee objects to an exemption and the bankruptcy court sustains that objection, the estate then owns the non-exempt asset. Once it is settled that the bankruptcy estate owns the non-exempt asset, the chapter 7 bankruptcy trustee is charged with reducing that asset to money. How do they do that? They sell the asset. When they sell the asset the trustee holds the money in trust for the creditors of the estate.
To best illustrate this, let’s use an example. Let’s assume Ted has 100k in credit card debt. Ted owns a home free and clear and it’s worth 175k. Ted also owns furnishings, clothing a $500.00 car, a 401k, and he also owns a condo in Florida worth 30k and there are no liens against it.
Ted would exempt his interest in his home, furnishings, clothing, car, and 401k. The trustee does not object to these exemptions so on the 31st day after the meeting of creditors, Ted owns these assets and none of his creditors can take them. His exempted assets come out of the bankruptcy estate. Ted’s condo is a different matter. Ted has no way to exempt the condo so he doesn’t exempt it.
Without exempting the condo, the condo remains in the bankruptcy estate. The trustee must liquidate the condo and reduce it to money. So, the chapter 7 trustee puts it up for sale, after costs of sale, nets 26k. Trustee puts that money in trust for the benefit of the estate’s creditors who will receive 26k spread out to creditors pro rata. What ever is not paid off gets “discharged” or wiped out.
Ted’s creditors would receive 26k and 74k of his credit card debt would get discharged. In most chapter 7 bankruptcy cases, debtors do not lose any assets. In most cases, debtors assets are all exempt and so on the 31st day after the meeting of creditors, these exempt assets come out of the bankruptcy estate, and no assets remain for the trustee to liquidate.
Chapter 7 trustees are strictly accountable for all property received in the Chapter 7 Bankruptcy estate. They hold all assets “in trust” for the benefit of the estate’s creditors. If the chapter 7 trustee’s accounting methods are sloppy or consistently off, they will not be a chapter 7 trustee very long.
The accounting that goes into a traditional non exempt asset estate is extensive and every penny is accounted for. When the check book is off, trustee’s can expect to receive a phone call from the US Trustee’s Office.
The code says the trustee shall make sure debtor complies with her stated intentions with respect to secured debts. If the debtor states on their statement of intention that they will surrender their car or house, they should do it. If debtor says she will reaffirm her car, she should do it. The enforcement of this has been reduced to the trustee handing the debtor a piece of paper at the 341 meeting where the trustee says you should comply with your stated intention. There is no other teeth to this other than that. Most chapter 7 trustees do no believe it is their job to police whether debtor has or has not complied with their statement of intention.
Of course, trustees also oversee compliance with many other aspects of the Chapter 7 Bankruptcy process as well.
Oh wow, this one sounds scary right? Like what kind of “investigation” are we talking about here? Does the chapter 7 trustee follow me in the meat market and ask what I am buying and why? Does the chapter 7 trustee come to my house and do an accounting of my assets?
When a debtor files for chapter 7 bankruptcy, they must file with the court a series of bankruptcy schedules that lay out the debtors assets and debts. These schedules are signed under penalty of perjury and must be complete, accurate, and correct. Failure to file accurate schedules with the court can result in the debtor losing his discharge.
When these schedules get filed with the court the trustee has access to them and reviews them thoroughly. Approximately 4-6 weeks after these schedules are filed with the court, the court schedules a 341 hearing. The hearing typically last 5-8 minutes. The trustee swears the debtor in and verifies that the information on the schedules is true and complete.
In a normal case, there is no other investigation other than what is stated above. Trustee’s rely on verified schedules to paint an accurate picture of the debtors financial situation. I have never had a trustee follow anyone in the meat department or go to debtors home and take an inventory themselves.
There are instances where trustees need to send agents to pick up non exempt assets and bring them to auction, but even this is not the normal case.
With the above said, trustee’s powers to investigate debtor’s financial circumstances are broad.
The Bankruptcy Code does list a number of circumstances where debtor can lose their discharge. If the trustee believes the debtor does not qualify for a discharge, the trustee will oppose debtor’s discharge or seek revocation of a discharge already granted.
Bankruptcy Code Section 727 lists a number of reasons why a debtor might lose their discharge. The saying in bankruptcy is the honest debtor deserves relief. Obviously, the corollary is the dishonest debtor does not deserve relief.
If the debtor has transferred or concealed or otherwise fraudulently transfers or destroys property of the bankruptcy estate, debtor can lose their discharge. This is true whether the transfer took place before or after the chapter 7 bankruptcy case was filed.
Debtor can lose their discharge if debtor fails to keep, destroys, or mutilates records from which debtor’s financial condition can be ascertained.
Much of the discharge litigation stems from debtor’s who knowingly lie under oath. Occasionally, we see debtors who get confronted by the trustee who hears from a third party about an asset the debtor might own. Instead of acknowledging the omission, debtors sometime choose to deny ownership of the asset fearing they will be in trouble for not including the asset on their schedules.
The cover up is always worse than the omission. If you are confronted with an omitted asset, acknowledge it! I tell people all the time you don’t get into trouble for accidentally getting something wrong, you will get into to trouble for knowingly getting something wrong.
While Chapter 7 Trustees have broad authority under Bankruptcy Code Section 704(a)(1) to reduce assets of the chapter 7 bankruptcy estate to money, there are limits to their powers and behavior. Trustee’s who lose “disinterest” and become self-interested in a case to the detriment of the unsecured creditors may lose their right to remain a chapter 7 trustee on the case.
Certainly, any trustee who self deals or incurs expenses that are not deemed related to the expenses of administering the assets of the estate, risk being removed from the case as a trustee and risk removal from the panel of chapter 7 trustees.
There are cases where trustee’s went to conferences out of state and brought their entire family asking the estate to pay for not only the trustee’s expenses but expenses for his wife and children too. Like debtors, trustees need to be policed too to make sure the integrity of the system remains intact.