The Chapter 7 Trustee is the individual assigned by the US Bankruptcy Court to administer the assets of the Bankruptcy Case.
This Article will discuss what in the world that means—and what the Chapter 7 Trustee wants to do in your Detroit, Flint, Ann Arbor, or Bay City bankruptcy case.
The Chapter 7 Trustee & the Bankruptcy Estate
First, it is important to remember that Michigan Chapter 7 bankruptcy is a liquidation process. That is, you “liquidate,” or discharge your debts in that you do not, with exception, pay anything to your creditors.
Chapter 7 is also a liquidation bankruptcy because, if you own any property or assets worth more than can be protected in the process, these assets are seized and liquidated. They are sold in order to generate a pool of money from which your creditors are at least partially repaid.
The person who actually seizes your unprotected assets, takes possession of them, auctions them off, and then mails checks to your creditors is the Chapter 7 Trustee.
The Chapter 7 Trustee is empowered to do all of these things by the US Bankruptcy Code. The “Code” is the Federal law governing the US bankruptcy process.
How Is Property Protected from the Chapter 7 Trustee?
1. The Chapter 7 Bankruptcy Estate
When you file a Chapter 7 bankruptcy in Michigan, a legal “estate” is created by automatic function of law. This “Bankruptcy Estate” is not much different than a probate estate created under Michigan law when a person passes away without an estate planning trust in place.
You can think of these “estates” as imaginary houses containing property to which you may or may not, yourself, hold a key.
Like a probate state, the Bankruptcy Estate contains all of the property that you own on the day that you file for Chapter 7.
The Bankruptcy Estate also, however, contains any claim that you may have to property you do not yet own. An example of this would be the fight to sue someone for money damages because you were bitten by their dog. Personal injury lawsuits, claims for the repayment of debts owed to you, the right to receive wages you’ve earned but have not yet received, commissions, tax refunds, and other such rights are also included in the Bankruptcy Estate.
Bitcoin, airline miles, credit card points, and intellectual property ownership interests such as copyrights and registered trademarks and patents are also included in the Chapter 7 Bankruptcy Estate.
Likewise, business ownership interests are also included in the Chapter 7 Bankruptcy Estate.
In short, if you can claim to own an item of property, it is an asset of your Chapter 7 Bankruptcy Estate.
The Chapter 7 Trustee is the administrator of your Bankruptcy Estate. This means that, for the 4-month duration of your bankruptcy case, he or she has legal possession of all of the property in the Estate.
Any property in the Bankruptcy Estate is, therefore, subject to be seized and liquidated by the Chapter 7 Trustee.
2. Exempting Property from the Bankruptcy Estate
Most Michigan residents who file for Chapter 7 bankruptcy do not lose any property to the Chapter 7 Trustee, however.
This is because the Bankruptcy Code and Michigan state law provide for a number of “exemptions” that allow property of certain types and up to certain values to be removed from the Bankruptcy Estate.
These “exemptions” allow you to remove those types of property from the Bankruptcy Estate. If an item of property has been entirely exempted up to its full fair market value, it has been removed from the Bankruptcy Estate entirely.
The Chapter 7 Trustee has no jurisdiction, in this case, to seize and liquidate that exempted property.
For example, the Bankruptcy Code contains an exemption for automobiles. The values of the exemptions are adjusted twice per year—usually in April and November. As of this writing, the Federal automobile exemption is $4,000.00.
Thus, if you own a car free and clear that is worth $3,500.00 in Blue Book value, it can be fully exempted. The Chapter 7 Trustee will not liquidate it.
However, if you own a car worth $4,500.00, it is in danger of being liquidated by your prospective Chapter 7 Trustee.
There are a number of such exemptions, as noted. There are exemptions for household goods, real estate, jewelry, electronics, and most commonly owned types of household property.
For most Chapter 7 filers in southeast Michigan, the available exemptions are fairly robust. The majority of Michigan Chapter 7 filers do not lose any property at all.
The Chapter 7 Trustee & Non-Exempt Property
What does the Chapter 7 Trustee do when you have property that cannot be exempted?
As stated above, the Chapter 7 Trustee has the authority to seize and liquidate that non-exempt property of your Bankruptcy Estate for the benefit of your creditors.
But does that always happen?
The answer to that question is that you should expect it to happen when deciding whether or not to file Chapter 7 bankruptcy in Metro Detroit. However, there are times when it does not.
First, it is important to note that the Chapter 7 Trustees are legal professionals who, like everyone else, are paid for the work that they do.
They receive, always, a small piece of the filing fee that you pay to the US Bankruptcy Court when you file as part of their overall compensation.
However, more interestingly (to them), they also retain a percentage of whatever funds they manage to retrieve and disburse to your creditors.
They are, in other words, very interested in those funds. And very interested in liquidating any property that will generate such funds.
All this said, the Chapter 7 Trustees are only paid when your creditors are paid. And they are required by law to act in the best interests (that means financial interests) of your creditors.
In other words, although it certainly happens, they are obligated to refrain from liquidating property if the effort wastes more money than it earns. They are also obligated to entertain settlement offers, whether brought to the table by you or some other party with an interest in that property.
Thus, there are at least 2 scenarios in which a Chapter 7 Trustee refrains from liquidating property that he or she is legally entitled to liquidate:
- The property has little or no fair-market value, would likely have few or no bidders at auction, or the fees or costs incurred in the seizure, storage, and auction of the property would not be profitable;
- You (or someone else) offers to “settle” the issue of asset liquidation for a lump sum payment that is acceptable to the Chapter Trustee.
Yes, virtually every Chapter 7 Trustee in Detroit, Ann Arbor, Flint, Bay City, Saginaw, Lansing, Kalamazoo, or Grand Rapids will consider a reasonable settlement amount to allow you to retain non-exempt property.
This negotiation will always work out better for you when conducted with the assistance of an experienced Metro Detroit bankruptcy attorney.
The Other Duties of the Chapter 7 Trustee
The Chapter 7 Trustee also has the job of administering your Chapter 7 case from a bureaucratic standpoint.
That is, he or she makes sure that it moves along from start to finish as required by the Bankruptcy Code and the Eastern District of Michigan Bankruptcy Court’s Local Court Rules.
The first thing that the Chapter 7 Trustee does is to receive all of the documentation provided on your behalf by your Livonia or Metro Detroit bankruptcy lawyer.
Much information and documentation is required to be provided to the Chapter 7 Trustee after the case is filed. Many pro se (no lawyer) Chapter 7 cases have ended badly simply because the debtor failed to turn over the right bank statements or income documentation or tax returns to the Chapter 7 Trustee in the manner required, within the timeframe required.
A bankruptcy lawyer will ensure that your discharge is not lost simply because you don’t know the rules.
The 341 Meeting of Creditors
The Chapter 7 Trustee then has the duty of presiding over your 341 Meeting of Creditors.
Within the Chapter 7 process, the 341 Meeting is usually the only hearing you actually need to attend. (In the wake of COVID, these hearings, in Detroit, are largely being held telephonically or via Zoom.) At the 341 Meeting, the Chapter 7 Trustee will ask you a series of questions, on the record, regarding your income, expenses, debts, and, especially, your assets.
It is the Chapter 7 Trustee’s role to ensure that no assets have been undervalued or left undisclosed. If he or she thinks that this sort of thing has happened, he or she will initiate litigation to recover those assets (even if they’ve been transferred to someone else). Additionally, the Chapter 7 Trustee may refer the case to the US Trustee.
The US Trustee is the division of the US Department of Justice tasked with maintaining the integrity of the bankruptcy process in this country. It is the US Trustee’s Office that will prosecute you for Federal felony crime of Bankruptcy Fraud if you have concealed assets.
After the 341 Meeting
Presuming that you have done no such thing, the Chapter 7 Trustee will next do 1 of 2 things after the 342 Meeting:
- Either retain professionals or engage in other actions to retrieve non-exempt or fraudulently transferred assets; or
- File a Report of No Distribution.
The Report of No Distribution is an electronic notation entered by the Chapter 7 Trustee onto your case docket that essentially says, “There is nothing to liquidate here, and I want nothing more to do with this case.”
If the Trustee files a Report of No Distribution, you can rest easy that your work is done and that your Discharge will be entered by the Court 60 days after the conclusion of your 341 meeting. (Or 30 days after the entry of the Report of No Distribution, if the Chapter 7 Trustee has been investigating alternatives into that 60-day period.)
Michigan Chapter 7 Trustees: Serious Business
The bottom line is that the Chapter 7 Trustees within Michigan’s bankruptcy court system are serious people intent on making a buck for your creditors—and for themselves.
If you own real estate (no matter what you think the value is), own a business, think you might be able to sue somebody for money, or just plain want things done the right way, the first time, you need to work with an experienced Livonia and Metro Detroit Bankruptcy Attorney.
The Hilla Law Firm has successfully represented hundreds of clients through Chapter 7 and Chapter 13 bankruptcy processes in Michigan.
We offer free, virtual and in-office consultations as well as friendly, one-on-one service from Livonia bankruptcy attorney John Hilla. We will ensure that your matter is handled properly, competently—and with kindness.