Understanding the Duties of a Chapter 7 Bankruptcy Trustee

Posted by on Sep 14, 2011 in Chapter 7 Bankruptcy Issues | 42 comments

Oftentimes, people file for chapter 7 bankruptcy protection but have an imcomplete understanding of who or what the chapter 7 trustee is.  A chapter 7 trustee is a crticial player in the chapter 7 process.  Oftentimes, the chapter 7 bankruptcy trustee is the only person with whom a debtor directly interacts with during a chapter 7 case; that interaction typically takes place during the 341 meeting of creditors. 

A chapter 7 bankruptcy trustee has fiduciary obligations in each case.  These duties include the duty of loyalty that prohibit the trustee from taking any action that is not in the best interest of the estate.   The bankruptcy trustee accordingly owes a duty of loyalty to the beneficiaries of the trust.  A trustee must be a disinterested professional which means a trustee and the trustee’s employed professionals must not be a creditor, an equity holder, an insider of the debtor, or a person with a conflict of interest to the case.  

However, a court can, under 11 U.S.C. Section 327 of the Bankruptcy Code, authorize the trustee to act as attorney or accountant for the estate if it is in the estate’s best interest – which typically means maximizing distribution to creditors from estate assets.  A trustee can also operate a debtor’s business under Section 372(b) and 721 of the Bankruptcy Code, upon court approval while opertaing under due care (ie. ensuring that insurance on estate property is in order);

A chapter 7 bankruptcy trustee’s primary duty is to maximize the value of the estate for the benefit of creditors.   Chapter 7 trustees must not only aggressively pursue assets but must temper that with the administrative expenses that would be incurred in doing so.  That is why chapter 7 bankruptcy trustees do not always pursue every single non-exempt asset or unlawful transfer that may belong to the estate, especially in cases where the net recovery is uncertain.

The chapter 7 bankruptcy trustee must also observe the duty of diligence in reducing the debtor’s property to money for distributions to creditors of the estate as “promptly” as possible.   See Federal Rule of Bankruptcy Procedure 3009.  Delays by the trustee are frowned upon as a matter of practice; it is actually spelled out in the Trustee’s Handbook as a matter of bad practice that undermines the public’s faith in the bankruptcy process.  As a  matter of general practice, a trustee is entitled to use his or her business judgment in determining how to proceed.  A trustee must also be competent under Section 321 of the Bankruptcy Code.  

A trustee also has a duty to be civil and appropriate with all parties because the bankruptcy system works best where parties cooperate with each other.   The National Association of Bankruptcy Trustee’s Canon of Ethics requires a trustee act with dignity and respect for debtors and creditors alike and to be sensitive to the diversity of participants.  A trustee should not be rude or insulting as a matter of practice at a 341 meeting of creditors.  The trustee has a duty to be impartial and not harbor any biases towards debtors.         

In cases where the debtor has acted inappropriately, a trustee can also oppose the debtor’s discharge under 704(6) of the Bankruptcy code and section 727 of the bankruptcy code.   See here for a previous indepth JCH Law Firm Blog discussion of 727 settlements. 

Attorney Jeffrey Hsu of JCH Law Firm worked for a former chapter 7 trustee and has experience researching and drafting motions for chapter 7 bankruptcy trustees.  These experiences allow Mr. Hsu to properly represent both debtors and creditors through the bankruptcy process.   Call us today at 1-800-371-5523 for your free consultation or to discuss your particular matter.   


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