Chapter 7 Trustee
Upon filing of the chapter 7 petition, an impartial case trustee is appointed by the United States Trustee to administer the case and liquidate the debtor’s nonexempt assets. If, as is often the case, all of the debtor’s assets are exempt or subject to valid liens, there will be no distribution to unsecured creditors. Typically, most chapter 7 cases involving individual debtors are “no asset” cases. If the case appears to be an “asset” case at the outset, however, unsecured creditors, who have claims against the debtor must file their claims with the clerk of court within 90 days after the first date set for the meeting of creditors. In the typical no asset consumer chapter 7 case, there is no need for creditors to file proofs of claim. If the trustee later recovers assets for distribution to unsecured creditors, creditors will be given notice of that fact and additional time to file proofs of claim. Although secured creditors are not required to file proofs of claim in chapter 7 cases in order to preserve their security interests or liens, there may be circumstances when it is desirable to do so. A creditor in a chapter 7 case who has a lien on the debtor’s property should consult an attorney for advice.

The commencement of a bankruptcy case creates an “estate.” The estate technically becomes the temporary legal owner of all the debtor’s property. The estate consists of all legal or equitable interests of the debtor in property as of the commencement of the case, including property owned or held by another person if the debtor has an interest in the property. Generally speaking, the debtor’s creditors are paid from nonexempt property of the estate.

The primary role of a chapter 7 trustee in an “asset” case is to liquidate the debtor’s nonexempt assets in a way that maximizes the return to the debtor’s unsecured creditors. The trustee will try to accomplish this in several different ways. First, the trustee will attempt to liquidate the debtor’s nonexempt property. This includes both property that the debtor owns free and clear of liens and property which has market value above the amount of any security interest or lien and any exemption that the debtor holds in the property. The trustee pursues causes of action (lawsuits) belonging to the debtor and pursues the trustee’s own causes of action to recover money or property under the trustee’s “avoiding powers.” The trustee’s avoiding powers include the power to set aside preferential transfer made to creditors within 90 days before the petition, the power to undo security interests and other pre-petition transfer of property that were not properly perfected under non-bankruptcy law at the time of the petition, and the power to pursue non-bankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law. In addition, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the debtor’s business for a limited period of time, if such operation will benefit the creditors of the estate and enhance the liquidation of the estate. All of these activities of the trustee are designed to produce the maximum return for the debtor’s unsecured creditors.

The distribution of the property of the estate is governed by section 726 of the Bankruptcy Code, which sets forth the order of payment of all claims. Under section 726, there are six classes of claims; and each class must be paid in full before the next lower class is paid anything. The debtor is not particularly interested in the trustee’s disposition of the estate assets, except with respect to the payment of those debts which for some reason are not dischargeable in the bankruptcy case. The debtor’s major interests in a chapter 7 case are in securing exempt property and in getting a discharge that covers as many debts as possible.