Rights of a Trustee Regarding Bankruptcy

by Beverly Bird
The trustee looks out for the interests of your creditors.

The trustee looks out for the interests of your creditors.

James Woodson/Digital Vision/Getty Images

When you declare bankruptcy, you give the trustee a great deal of control. This individual is appointed by the United States Trustee -- a division of the federal government -- to manage your bankruptcy estate, which is effectively everything you own. The rights and responsibilities of the trustee vary depending on what type of bankruptcy you declare.

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Trustee Qualifications

Because the trustee has significant power over your estate, the U.S. Trustee is particular about who it appoints to the position. The individuals who serve are not government employees. They're usually lawyers or accountants in the private sector. The U.S. Trustee vets them, requiring that they pass FBI background checks before they're appointed and again every five years as they continue to serve. They must post bond with the government, an insurance policy that pays damages if they commit any wrongdoing that harms a creditor or debtor.

Trustee's Obligation to Creditors

Trustees are fiduciaries, meaning they have a duty to act in the best interests of others. This is a bit misleading, however, because their first obligation is not to you, but to your creditors. The rights vested in them by statute all come down to one issue: making sure that all your creditors are treated equally and get a fair shake in the proceedings.

Chapter 7 Bankruptcies

In a chapter 7 proceeding, the trustee is empowered to take control of your non-exempt assets and sell them to pay your creditors. The bankruptcy code decides what property you can keep through exemptions, so it's generally not a personal decision on the trustee's part as to what is sold and what you're permitted to retain. He does have the right to decline to sell a certain asset or piece of property, however. This might happen if the value of the asset is negligible and he feels that liquidating it wouldn't result in enough payment to your creditors to warrant the effort and expense.

Chapter 13 Bankruptcies

Chapter 13 involves funding a plan to pay your debts over a three- to five-year period. You're obligated to turn your disposable income over to the trustee each month, and he submits this money to your creditors. The trustee does not have a right to decide the amount of your payments. These are set by code, depending on how much money you have left over each month after paying reasonable and necessary living expenses. He doesn't have a right to establish how much to give each of your creditors because this is also established by the bankruptcy code. Creditors are grouped into categories based on the priority of their debts as set by statute. The trustee has a right to investigate your finances to determine whether you're reporting all income and resources. If he finds that you've misrepresented some pertinent fact, he has a right to object to your bankruptcy discharge.

Avoidance Powers

One of the most significant rights a trustee has is the ability to pull back into your bankruptcy estate any property you give away or sell for less than fair market value in the months preceding your filing. For example, if you own something of both sentimental and monetary value and you don't want the trustee to sell it, you can't transfer ownership to your brother and then file for bankruptcy, planning to take the property back later. The trustee can demand return of the property to your bankruptcy estate. These are commonly called avoidance powers -- and they apply to payments you make before your bankruptcy filing as well. If you pay any creditor within 90 days, the trustee can demand that the company return the money so it can be fairly apportioned among all your creditors. If you pay a family member, called an "insider," within a year before you file, the trustee can demand that your family member return the payment.