A Chapter 7 Bankruptcy is a liquidation bankruptcy. That means that any assets that you own or have a right to receive become part of the bankruptcy estate to potentially be sold or liquidated to pay your creditors. Your attorney will advise you whether you are a candidate for Chapter 7 bankruptcy based, in part, on whether the type and value of assets you own fit under bankruptcy exemptions that will allow you to keep those assets.
The duties of the Chapter 7 Trustee, under Section 704 of the Bankruptcy Code, include conducting a financial investigation of each debtor assigned to him/her to make sure there is no fraud and that any non-exempt assets are collected, liquidated and their proceeds used to pay creditors.
The Trustee begins this process at a Meeting of Creditors (Bankruptcy Code Section 341), where he/she conducts a hearing and questions the debtor under oath about his/her assets and income. Failure to attend this meeting could result in your case being dismissed.
How is a Chapter 7 Trustee selected?
Each jurisdiction (e.g., the Eastern District of Michigan, Southern Division - Detroit) has a panel of Chapter 7 Trustees. When a new case is filed, the Bankruptcy Court Clerk's office randomly assigns a Trustee to that case as "interim trustee." Unless a successor trustee is appointed later (e.g., due to the initial trustee being removed for conflict of interest), that trustee becomes the permanent trustee for the life of the case.
Does the Chapter 7 Trustee decide if my case will conclude successfully?
No. Although the Trustee conducts hearings under Section 341 of the Bankruptcy Code, he/she is NOT a judge. The Trustee has standing to object to a bankruptcy being discharged if he/she suspects fraud for example. But the route to request this is for the Trustee to file a Motion. You still have a right, as a debtor, to respond to that motion and defend against it at a hearing in front of a Bankruptcy Judge. The judge makes the final decision.
What do I do if I am contacted directly by the Chapter 7 Trustee?
If you are represented by an attorney, unless otherwise authorized by your attorney, the Chapter 7 Trustee's office should not be contacting you, a represented party, directly. While the Trustee may need to gather certain financial information for his/her asset report to the Court, those inquiries should go through your attorney's office. If you are receiving communications directly from the Trustee, contact your attorney immediately to review them together before responding.
What is a 2004 Exam?
Bankruptcy Rule 2004 allows for an interested party, include a Chapter 7 Trustee, to conduct a deposition of a debtor separate from the Meeting of Creditors. This is generally done if there is some unique asset with substantial documents to be reviewed. (for example, if the debtor owns a business venture)
You have the right to have your attorney present with you at a 2004 exam. Your attorney may object to certain lines of questioning and may instruct you not to answer certain requests from the Trustee.
What is an Adversary Proceeding?
This is a separate lawsuit that is brought in the Bankruptcy Court. A Chapter 7 Trustee might use such a lawsuit to recover property that was transferred preferentially to one creditor right before the case was filed, to then divide it with other creditors.
Adversary proceedings can also be brought by creditors who allege that their particular claim is non-dischargeable under the Bankruptcy Code (e.g., based on fraud).
The Local Bankruptcy Rules in the Eastern District of Michigan permit a debtor's attorney to exclude Adversary Proceedings from their scope of services. Check your retainer agreement and check with your attorney. If you are sued, there is a time limit to reply, and you should not assume your original attorney will be doing this without a separate retainer agreement.
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