The Chapter 7 Trustee reviews the debtor’s schedules for non-exempt assets, ensures that the debtor has complied with various code provisions relating to tax returns and payment advices, and he examines the debtor at the meeting of creditors. The Chapter 7 Trustee’s duties are to:
a. collect and reduce to money estate property and close the estate as expeditiously as possible, within the best interests of the parties in interest;
b. account for all property received;
c. ensure the individual debtor performs his or her intentions under Section 521(2)(B);
d. investigate the debtor’s financial affairs;
e. examine proofs of claim and object to the allowance of any claim that is improper, if a purpose would be served;
f. oppose the discharge of an individual debtor, if advisable;
g. furnish such information concerning the estate and the estate’s administration as is requested by a party in interest, unless the court orders otherwise;
h. if the business of the debtor is authorized to be operated, file with the court, the U.S. trustee, and applicable taxing authorities periodic reports and summaries of the operation of the business, including a statement of receipts and disbursements, and any other information that the U.S. Trustee of the court requires; and
i. make a final report and file a final account of the administration of the estate with the court and the U.S. trustee.
The Chapter 7 Trustee’s main role is to identify non-exempt assets and liquidate those assets for the benefit of creditors. If there are no non-exempt assets, the Chapter 7 Trustee will issue a Report of No Distribution, and take no further action on the case.
The Chapter 7 Trustee may employ an attorney, appraisers, auctioneers, and other professionals to assist in the liquidation. Liquidation may involve sale of real or personal property, either at private sale or public auction, collection of accounts receivable and other money owed the debtor, and the pursuit of causes of action belonging to the debtor.
The Chapter 7 Trustee may also bring certain avoidance actions on behalf of the debtor’s estate. These are causes of action which specifically arise in bankruptcy, and are designed primarily to insure that no single creditor is favored over other similarly situated creditors. In a Chapter 7, there are three main types of avoidance actions:
a. Preference actions. A preference is a transfer to a creditor on account of an “antecedent debt” (i.e., a debt predating the payment as opposed to a contemporaneous purchase and sale) that puts that creditor in a more favorable position than other creditors. The payment must be made within 90 days of the date of filing, or within one year in the case of insiders (relatives, partners, corporate officers, affiliates, etc.), and while the debtor is insolvent. Insolvency is presumed in the 90 days prepetition. The creditor must have received more by the payment than it would have received in Chapter 7 if the payment had not been made.
The trustee may demand that the creditor return the funds to the bankruptcy estate, so that the money maybe distributed equally to all creditors. A transfer need not be one of money; a debtor who gives an unsecured creditor a deed of trust in his personal residence, to secure an old debt, and he has made a preferential transfer.
b. Fraudulent transfers. The trustee may avoid any transfer of an interest of the debtor in property, made within two years of filing, if the debtor (a) made the transfer with the actual intent to hinder, delay, or defraud creditors, or (b) received “less than a reasonably equivalent value in exchange for such transfer”, and was insolvent at the time of the transfer or became insolvent because of the transfer. This is an action both to insure that no creditor receives an unfair advantage and to prevent the debtor from improperly sheltering assets.
The statute allows the Trustee to avoid transfers made with the actual intent to hinder, delay, or defraud creditors;.e.g., a quit claim deed of real property with equity, to the debtor’s sibling, for no consideration and to keep it out of the reach of creditors. The statute also allows the Trustee to avoid “constructive fraud,” regarding transfers that were made for less than reasonably equivalent value.
c. Lien Avoidance. The trustee is given “strong arm powers”, including the power of a hypothetical judgment lienholder or bona fide purchaser of real property. This provision enables the trustee to attack and set aside unperfected security interests in both real and personal property. For example, a creditor who loans money to the debtor, and takes a deed of trust in the debtor’s house, but fails to properly record the deed, would be vulnerable to the trustee’s power to avoid that deed of trust.