Can a Bankruptcy Trustee Block a Discharge?

by Heather Frances J.D. Google
Bankruptcy cases begin by filing a petition in court.

Bankruptcy cases begin by filing a petition in court.

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A bankruptcy trustee is a neutral professional appointed by the federal bankruptcy court to administer your bankruptcy case. The trustee has various roles depending on the type of bankruptcy case you filed, but can recommend dismissal of your case, thereby blocking your discharge, or the elimination of unpaid debts. The trustee is not permitted to give individual legal advice to debtors, so if a debtor does not correctly file his petition, the trustee can ask the court to dismiss the case before it even gets started.

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Chapter 7 Bankruptcy

A Chapter 7 bankruptcy case is sometimes referred to as liquidation because the trustee takes the debtor’s nonexempt assets and liquidates them to pay his debts. Frequently, there are few assets to sell after the exempt assets are removed from the bankruptcy estate, but if any exist, it is the trustee's responsibility to seize and sell them. Once the available assets are sold, a debtor’s remaining unpaid debts are eligible for discharge.

Trustee’s Role in Chapter 7

A trustee’s role in Chapter 7 is to administer the sale of assets and distribution of proceeds, but he also watches for preferential treatment given by the debtor toward specific creditors. A trustee may also notice fraudulent transfers where a debtor has sold or transferred an asset to a third party -- usually a family member or close friend -- for far less than fair market value in an attempt to save it from being sold in the bankruptcy. If the trustee notices a fraudulent transfer, he can try to recover that property and sell it to pay creditors. The trustee may also bring a motion in bankruptcy court to dismiss a case or deny the debtor’s discharge if the debtor is abusing the bankruptcy system through fraud, perjury or ineligibility.

Chapter 13 Repayment Plan

Chapter 13 bankruptcy creates a repayment plan under which the debtor will make payments on his debts over three or five years. The trustee investigates the actions, assets, liabilities and financial condition of the debtor, including how the debtor’s business operates and whether it should continue. The trustee can look at any matter relevant to the debtor’s case or repayment plan to determine whether the plan is appropriate. Generally, the trustee recommends approval of the repayment plan if it appears the debtor has made honest disclosures and all objections to the plan have been resolved.

Trustee’s Role in Chapter 13

The trustee has a duty to make recommendations to the court about the debtor’s case, including whether the repayment plan should be approved or whether the case should be dismissed. The court can accept or reject a trustee’s recommendations. During the repayment plan period, the trustee may request dismissal of the debtor’s case if the debtor stops making payments as required and does not ask for a suspension of the plan. This type of dismissal would block the debtor’s ability to receive a discharge.