What Do Bankruptcy Trustees Look For?

A bankruptcy trustee oversees a bankruptcy filing and plays a major role in determining if a case goes forward.

Trustees are appointed by the bankruptcy judge to look for assets that can be used to pay creditors and that includes an in-depth investigation of your finances, if you are the one filing for bankruptcy.

While trustees are neutral parties, a main duty is to make sure creditors get paid as much as possible for what they are owed. The bankruptcy trustee will look for property, income and assets, as well as whether you are hiding assets.

What the trustee specifically looks for depends on whether it’s a Chapter 7 or Chapter 13 bankruptcy, the two most common types of bankruptcy. In both cases, the trustee’s investigation will include comparing the paperwork you filed (legally, called “the schedules”) with financial records and other information.

A bankruptcy trustee is experienced in finding red flags that can lead to a dismissal, or even fraud charges. If you file for bankruptcy, it makes sense to be honest about your assets and debts and work with the trustee. The success of your case often depends on it.

What Is a Bankruptcy Trustee?

The trustee is officially an officer of the U.S. Department of Justice, under the office of the U.S. Trustee.

In every bankruptcy case, no matter what chapter is filed, the bankruptcy court appoints a trustee to assess the estate. The trustee investigates the case, recommends whether it should go forward, and if it does, administers it.

One key thing to know is that trustees don’t represent parties who have filed for bankruptcy, Kevin Rucinski, a Chapter 13 trustee based in Ohio, said. “The trustee’s role is to provide an independent investigation of the bankruptcy case, litigation of issues when the case is not in compliance with the bankruptcy code, and the financial administration of funds pursuant to orders of the bankruptcy court,” Rucinski said.

Bankruptcy trustees are required to have the legal and financial knowledge to know the ins and outs of bankruptcy and how it works. While a law degree isn’t required, many bankruptcy trustees have one. For instance, Rucinski is both a certified public accountant and a lawyer.

What Does a Bankruptcy Trustee Do?

A bankruptcy trustee’s role varies, depending on the type of bankruptcy, but in both types they review all the documents filed and investigate the person’s assets and income. They make a recommendation on whether the case should go forward. If it does, they administer the case, particularly making payments to creditors.

“All people filing for bankruptcy must make full disclosure of their financial information, including disclosing all income and assets,” Rucinski said. “Both Chapter 7 trustees and Chapter 13 trustees investigate the disclosures in the bankruptcy plan and schedules to verify that the information is accurate. This investigation helps maintain the integrity of the bankruptcy system so that all parties are treated fairly and in compliance with the bankruptcy code.”

One major part of the investigation is the meeting with creditors, officially known as a 341 hearing. The trustee, on both Chapter 7 and Chapter 13, facilitates the meeting, at which the trustee reviews the debts, goes through the documents, and determines how much creditors will be paid.

Since the trustee is appointed by the bankruptcy court, he or she can only act with the court’s approval, but their recommendations carry a lot of weight.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often called “liquidation bankruptcy,” because, in theory, the assets are liquidated to pay off unsecured debt. In reality, most people who file Chapter 7 keep most of their assets, including their house, car, and other things necessary to live. Nearly 70% of bankruptcies filed by individuals in 2022 were Chapter 7.

“Chapter 7 trustees have the responsibility to look for assets,” Rucinski said. “Pursuant to court order, the assets are sold, and the proceeds are paid to creditors.”

Those filing Chapter 7 must pass a means test, which assesses whether they have the means to pay their unsecured debt (credit cards, medical bills, etc.). If they pass, the non-exempt items are sold and the money raised pays the trustee and covers administrative fees, with the rest going to creditors. The trustee determines what property is exempt and investigates to make sure all non-exempt items and assets are listed.

Chapter 13 Bankruptcy

“Chapter 13 trustees do not sell assets,” Rucinksi said. “Pursuant to court order, people who file Chapter 13 make monthly payments to the trustee and the funds are distributed to creditors. This repayment plan allows people to save their home, cars, and other assets.”

Chapter 13 bankruptcy involves a 3-5-year payment plan set up by the bankruptcy court. Once the plan is completed (something only about half of those who file Chapter 13 accomplish), the rest of the unsecured debt is discharged. In 2022, 29% of individuals filing for bankruptcy chose Chapter 13. People usually file Chapter 13 because they don’t pass the Chapter 7 means test. The trustee looks for signs of this during the meeting with creditors, which is a big part of the investigation phase of a bankruptcy.

A Chapter 13 trustee:

• Determines that the person filing has the income to make payments
• Determines creditors are getting the same amount they would if it were a Chapter 7 filing with nonexempt assets
• Collects monthly payments from the individual
• Pays creditors

What Does the Trustee Look for in Bankruptcy Schedules?

Determining how much money the person who filed has available to pay creditors involves a thorough investigation by the bankruptcy trustee into every corner of the debtor’s financial life. The trustee reviews the bankruptcy schedules (the legal term for the documents the debtor filed) and checks them against tax forms, pay stubs, bank statements and anything else that shows money coming in or property owned. They review the filer’s budget to make sure there isn’t money being spent that could go to creditors.

They also look for previous bankruptcy filings. A person can file bankruptcy within 180 days of a case being dismissed, but if they go through a bankruptcy and their debt is discharged, they must wait longer. A person whose debt was discharged through a Chapter 7 bankruptcy must wait eight years to file Chapter 7 again and four to file Chapter 13. A person whose successfully completed a Chapter 13 bankruptcy must wait up to six years to file Chapter 7 and two years to file Chapter 13.

The trustee is looking for accuracy in the schedules, so there’s a complete picture before the bankruptcy can go forward.

Non-Exempt Properties

In a Chapter 7 filing, exempt property is anything you own, as well as income, which is necessary for you to live and to get a leg up after the bankruptcy. This property is exempt from liquidation. Bankruptcy exemptions include your house, car, work equipment, Social Security and pension payments, and more. Many Chapter 7 cases are “non asset” cases, which means there is no non-exempt property, and the person filing doesn’t lose any of their belongings. Non-exempt items are ones that are unnecessary and also are of value and can be sold (or in the case of accounts, used) to pay debt. The trustee weighs the value of items in determining if liquidating them is worthwhile. For instance, a painting by your grandmother on your living room wall that has sentimental value, but wouldn’t sell for much, is something you’d keep. If it’s by Picasso, however, it likely would be added to non-exempt assets.

Some examples of nonexempt property are:

• Cash and money in bank accounts
• Stock investments
• Second home
• Second car
• Recreational vehicles like boats, ATVs, snowmobiles
• Coin, stamp or memorabilia collections
• Musical instruments (if the debtor isn’t a professional musician)
• Family heirlooms
• Valuable art
• Jewelry
• Designer clothes and accessories

Reversable Transactions

A bankruptcy trustee will look for recent financial transactions see if any are reversable, voidable or claw-back transactions (the money is being “clawed back” from where it went). They are financial transactions that can be canceled so that the money can be returned to the estate to pay creditors. These may be payments to a creditor, or they could be money or items given to a relative or friend. Some people who file for bankruptcy make such transfers in an attempt to hide assets. Trustees can look back at any transaction made within 90 days of a bankruptcy filing to see if it applies. Trustees can also look back at certain property transactions and payments to family or friends, a year before the filing. If trustees believe fraud is involved, they can look back as far as they think is necessary.

Types of reversable transactions are:

• Gifts of large amount, value, or quantity, particularly to relatives or friends
• Transfers for less than full value
• Transfers that favor one creditor

Red Flags Bankruptcy Trustees Look For

Rucinski said trustees expect issues with bankruptcy filings. When this happens, the biggest harm is to the debtor, because it will delay the proceeding.

“Problems such as incomplete and inaccurate bankruptcy plans and schedules do not cause problems for the trustee, as the parties are allowed to amend their disclosures,” he said. “The real problem is that people who have filed bankruptcy and need financial relief can be delayed in receiving that relief until their plan and schedules are accurate.”

To avoid delays, people should work closely with a bankruptcy attorney to make sure all disclosures are accurate, he said.

Given that there are 23 federal forms to fill out when filing bankruptcy, and a slew of state forms as well, it’s no wonder there are innocent mistakes and inaccuracies. But sometimes omissions are deliberate.

Bankruptcy trustees will look for red flags that may indicate dishonesty about assets and income. Some of these are hidden assets, non-exempt property that’s categorized as exempt, and missing pieces in a person’s financial history.

Hidden Assets

Hidden assets are exactly what they sound like – property or accounts that are worth more than indicated in the documents filed.

The following items in your schedules might lead the trustee to hidden assets:

• Missing financial records
• Closed bank or investment accounts
• Assets listed are undervalued
• Debt or expenses appear for assets that aren’t listed
• Recent property transfers
• A claim property was stolen, but there’s no police report or insurance claim
• Payment or paperwork for a safe-deposit box
• Property in your possession that “belongs to a friend”
• Income from no obvious source
• Insurance claims that are pending

Property Issues

In a Chapter 7 filing, the trustee wants to make sure exempt property qualifies as being necessary either for living or for work.

Some things the trustee looks at:

• Actual value of the property listed
• What tools, equipment, vehicles, etc. are needed for work
• A spouse’s property if only one spouse is filing bankruptcy
• Recent moves between states (states have their own rules about exemptions)

Chapter 13 Bankruptcy Issues

A Chapter 13 bankruptcy comes with its own set of issues, since the person who files must have an income that can meet the payment plan, and their debts can’t exceed a certain cap.

A Chapter 13 trustee will look at:

• Income not included in the schedules
• Spouse’s income (which counts as income for the person filing)
• Debt that exceeds the allowed limit
• Assets transferred before filing

What Happens if a Bankruptcy Trustee Suspects Fraud?

Bankruptcy fraud involves a person deliberately hiding assets, income or otherwise misrepresenting their finances and can result in serious consequences. Part of a trustee’s job is to look for fraud.

Some deliberate omissions don’t rise to the level of fraud but can still get a case thrown out. The trustee can file an objection to the debts being discharged if the investigation uncovers something like another bankruptcy discharge that wasn’t disclosed, or that the debtor had too much income to pass the means test. Neither of these are fraud, but they arise from not being accurate in the filing documents and not qualifying for a discharge.

If the trustee finds that the person knowingly concealed assets or income, lied under oath, committed bribery or embezzlement, lied in their documents, or filed a false claim, the case may be handed over to the U.S. Attorney, the FBI or some other law enforcement entity.

Investigative tools the trustee uses to get to that point include the meeting of creditors, officially a 341 hearing, and possibly an adversary proceeding, which is a lawsuit the trustee files when possible fraud is uncovered.

Meeting of Creditors

The meeting of creditors is actually a meeting between the bankruptcy trustee and the person who is filing. Creditors may attend, but usually don’t. The meeting’s purpose is to make sure that the forms are all accurate, with all income, assets and debts accounted for.

The trustee reviews the documents and planned debt payments with the debtor, who has to answer questions under oath. A debtor will have to verify name, address, Social Security number; current employment information; swear they’ve reviewed and signed the documents; and that all the information provided is accurate. They’ll be asked if there are any errors or omissions to correct.

Other questions the trustee will likely ask (though there could be many more):

• Are all of your assets identified?
• Are all of your creditors listed?
• Have you previously filed bankruptcy?
• Have you filed amendments to the tax return provided?
• Do you pay alimony or child support? Are you current with payments?
• Do you own or have interest in real estate?
• Have you made property transfers in the year before filing?
• Have you made large payments to anyone in the year before filing?
• Does anyone hold property belonging to you?
• Do you have a claim against any person or business?
• Are you the plaintiff in a lawsuit?
• Are you entitled to life insurance proceeds, an inheritance, tax return, divorce or separation payments?

Adversary Proceedings

The person who files for bankruptcy isn’t the only one who may have committed fraud. A bankruptcy trustee’s investigation may also uncover fraud by a creditor. In either case, a trustee may file a lawsuit, which is called an adversary proceeding. There are nearly 16,000 adversary proceedings filed a year in bankruptcy cases across the U.S. The suit can target something specific, like asking that the bankruptcy court reverse a property transfer or that property wrongfully seized by a creditor be returned. It can also result in a recommendation that the bankruptcy filing be dismissed, or in handing over the case to law enforcement.

Other Bankruptcy Trustee Investigative Powers

Other ways bankruptcy trustees can investigate a case that may result in the court taking action include:

• Rule 2004 Examination: A trustee who suspects fraud can question the debtor under oath in a longer version of the meeting of creditors, asking any questions they think may apply about finances and financial behavior. The trustee can also demand documents to determine whether there is fraud.
• Inspect Property: The trustee can do an inventory of the contents of the debtor’s home and business, any storage units, safe-deposit boxes and more.
• Subpoena power: A trustee can subpoena third parties to testify to the debtor’s financial situation.

Speak to a Credit Counselor Before Filing Bankruptcy

Anyone who files for bankruptcy is required to take a credit counseling course 180 days or less before filing. The bankruptcy court won’t accept a filing unless you can produce a certificate showing you took the course.

The point  of pre-bankruptcy credit counseling is to make sure that all options to pay down debt were exhausted before filing for bankruptcy.

Bankruptcy is the nuclear option of debt relief. While it gets rid of debt you can’t handle, it stays on your credit report for 7-10 years, decimates your credit score, and makes it hard to get any kind of credit, increases rates for things like insurance, and may even have an impact on your ability to get a job.

Talking a counselor at a nonprofit credit counseling agency will help you put things into perspective if you are overwhelmed by debt. The counselor will help you explore other options, including ones that can improve your credit rather than damage it.

A credit counselor will review your finances, help you create a budget and go over all debt-relief options and help you figure out which is best for your situation. Options before bankruptcy include a debt management program, debt settlement, nonprofit debt settlement and debt consolidation loans. While some of them will damage your credit, none will have the negative impact a bankruptcy will.

And a debt management program can actually improve your credit shortly after you begin and eliminate debt in 3-5 years.

Credit counselors at nonprofit agencies are required by law to act in your best interest. Once you meet with a credit counselor, you may never have to meet with a bankruptcy trustee.