What Happens If The Us Trustee Audit Finds A Material Misstatement
If the audit firm finds a material misstatement in your bankruptcy documents and financial records, you will have the opportunity to explain the discrepancy and amend your bankruptcy documents. If you are not able to explain the discrepancy satisfactorily, the U.S. Trustees office has several options.
For a Chapter 7 case in which the U.S. Trustee finds a material misstatement, the options include:
- Requiring an amendment to the bankruptcy schedules
Who Is The Bankruptcy Trustee
One way to understand the bankruptcy trustee is to start by looking at who the trustee is not.
- The Bankruptcy Trustee is Not the Bankruptcy Judge
The bankruptcy judge is a judicial officer of the Unites States court system. The bankruptcy judge is empowered with decision-making authority over legal issues related to bankruptcy cases.
However, in most bankruptcy cases, the debtor has little or no direct contact with the bankruptcy judge. The only bankruptcy official that the debtor is likely to have contact with is the bankruptcy trustee. As a result, some debtors may mistake the bankruptcy trustee for the bankruptcy judge.
- The Bankruptcy Trustee is Not the United States Trustee
Which trustee are we talking about? There are actually two trustees involved in bankruptcy cases: the U. S. Trustee and the bankruptcy case trustee .
The Office of the United State Trustee is a division of the U.S. Department of Justice. The U.S. Trustee is charged with several tasks, including overall supervision of the bankruptcy system, appointment of case trustees, and review of individual bankruptcy cases. The U.S. Trustee will impact a bankruptcy case, but it is not what most people think of as the bankruptcy trustee.
- The Bankruptcy Trustee Administers the Assets of the Bankruptcy Estate
When you file for bankruptcy protection, a bankruptcy trustee is usually appointed. The bankruptcy trustee is often an attorney with experience in bankruptcy law.
A Trustee’s Fee Structure Depends On Whether You File For Chapter 7 Or Chapter 13 Bankruptcy
Updated by Cara O’Neill, Attorney
The bankruptcy trustee is responsible for overseeing a filer’s bankruptcy case and, of course, gets paid to do the job. But it’s fair to say that the trustee’s interests align more closely with bankruptcy creditors than those of the debtor. In bankruptcy, trustees receive the following:
- a percentage of the property sales proceeds dispersed to Chapter 7 creditors, and
- up to 10% of the monthly amount paid to Chapter 13 creditors.
As you prepare for the creditors’ meeting, be sure to review the questions asked in a 341 meeting. Then check out 341 Meeting of Creditors Explainedit will help guide you through the creditors’ meeting process.
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The Bankruptcy Trustee Definition For Chapter 13 Case
The duties of a trustee in a Chapter 13 bankruptcy case are like those of a Chapter 7 trustee. A Chapter 13 trustee must review the debtors bankruptcy schedules to determine if all property is listed.
He or she must also object to any exemptions filed incorrectly or fraudulent transfers of property. However, a Chapter 13 trustee does not sell property of the estate. The debtor retains property while he or she is making payments to the Chapter 13 trustee according to the bankruptcy repayment plan.
The Chapter 13 trustee mainly deals with duties and responsibilities related to the repayment plan including:
- Reviewing the proposed repayment plan and objecting to the various terms within the plan when necessary.
- Review and object to the claims filed by creditors when appropriate.
- Receive monthly payments from the debtor and distribute funds, according to the terms of the confirmed plan.
- Review the debtors filed tax returns each year, if requested by the trustee.
- Respond to motions from the debtor related to the repayment plan.
What Does The Bankruptcy Trustee Do
After your bankruptcy case is filed, it is assigned a bankruptcy trustee. What does the bankruptcy trustee do? Depending on if the case is Chapter 7 or 13, the trustee will inspect your case for accuracy and compliance with Federal Law. In a Chapter 7 case, if there are assets to distribute, the trustee contacts creditors and distributes funds. In a Chapter 13 case, the trustee also receives your monthly payments and distributes money monthly to creditors.
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What Is The Meeting Of Creditors
Also known as a 341 meeting, the creditors meeting is conducted by your trustee. Its mandatory for you to attend. During the meeting, your trustee or creditors may ask you questions about your financial situation and bankruptcy documents. These meetings are often very brief, and your creditors can choose to attend, but theyre not required to.
Selling Chapter 7 Bankruptcy Assets
The Chapter 7 bankruptcy trustee is also responsible for selling property that the debtor cannot protect and distributing the funds to creditors. Here’s how it works.
In Chapter 7 bankruptcy, you can keep, or “exempt,” a certain amount of your property, such as household furnishings, clothing, and a qualifying retirement account. The particular assets that you can protect will depend on your state’s exemption statutes.
- When you have nonexempt property. Any nonexempt propertyproperty you own that’s above and beyond the amount allowed by your statewill be sold by the trustee to pay your creditors. It’s important to determine what will happen to your property before you file for Chapter 7 bankruptcy. You don’t have an automatic right to dismiss your case, and many judges will not allow you to do so just because you didn’t realize the trustee would sell your property.
- When you don’t have nonexempt property. If there aren’t any nonexempt assets, the trustee will prepare a report stating your case is a “no-asset” case and that there won’t be any distributions to creditors.
Sometimes the debtor and trustee disagree about the exemption status of a particular asset. In such cases, the bankruptcy judge will make the final determination.
If you have property to turn over, you or your attorney will make arrangements with the trustee to do so.
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Claim An Exemption In The Property
Debtors and non-debtor co-owners must be aware of their rights to claim an exemption in the property. This issue often arises when non-debtor spouses or ex-spouses are brought into a bankruptcy. Under California law, the non-debtor status of Chapter 7 debtors former spouse does not preclude them from claiming a state-law exemption in property of the bankruptcy estate. In re Pass, 553 B.R. 749 . In fact, transfers of property with no equity after an exemption may be excluded from fraudulent transfer laws, though such a transfer should not be done post-petition when that property becomes property of the bankruptcy estate.
What Is A United States Trustee Audit In A Bankruptcy Case
Federal law requires the United States Trustee to conduct audits of some Chapter 7 and Chapter 13 bankruptcy cases. If you are considering filing for bankruptcy, you should know what it means for the United States Trustee to audit a bankruptcy case, when they occur, and what happens if the U.S. Trustee audits your case.
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The Chapter 7 Trustee’s Payment
A Chapter 7 trustee gets a meager $65 per case to conduct a basic review of a debtor’s bankruptcy petition . However, a Chapter 7 trustee stands to earn much more. The court pays the trustee a commission on the funds distributed to the debtor’s creditors.
The funds could come from any number of nonexempt sources , such as money in the debtor’s bank account, nonexempt property the trustee liquidates , or funds the debtor agrees to pay to keep nonexempt property . The trustee receives 25% of the first $5,000, 10% of any amount between $5,000 and $50,000, and 5% of any additional money up to $1,000,000.
Red Flags The Trustee Looks For At The Meeting Of Creditors
The following are common red flags the trustee will ask about at the meeting of creditors.
Undisclosed or Undervalued Property
In both Chapter 7 and Chapter 13 bankruptcy, the value of property mattersprimarily because of the rule that entitles unsecured creditors to an amount equal to your nonexempt property. Here is how this works.
A Chapter 7 trustee sells nonexempt property to pay unsecured creditors. By contrast, the Chapter 13 trustee doesn’t sell property. Filers can keep every they ownbut that doesn’t mean they get a free ride. A filer must pay unsecured creditors at least as much as they’d receive in Chapter 7 through the repayment plan. This is known as the “best interest of creditors test.”
Not only are the creditors’ rights at stake, but the trustee gets paid according to the amount dispersed to creditors. The more assets, the more the trustee benefits financially. So, you can expect the trustee to look into your property holdings thoroughly and ask about any red flags.
For instance, the trustee might disagree with the value you’ve placed on an item or suspect that you sold an asset for less than it was worth and ask about it. Orand this does happenan ex-spouse or ex-business partner might claim that you’re hiding especially valuable property. Expect the trustee to follow that tip.
Unverified Income
Excessive Expenses
Recent Creditor Payments
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The Chapter 13 Trustee’s Role In Your Case
Many Chapter 13 trustees play an active role in the cases they administer. This is especially true in small suburban or rural judicial districts, or in districts with numerous Chapter 13 bankruptcy cases. For example, a trustee might:
- give you financial advice, such as helping you create a realistic budget
- help you modify your plan, if necessary
- give you a temporary reprieve or take other steps to help you get back on track if you miss a payment or two, or
- participate at any hearing on the value of an item of property, possibly even hiring an appraiser.
Despite the trustee’s interest in your finances, your financial relationship with the trustee has its limits.
You will be in control over money and property you acquire after filingas long as you make the payments called for under your repayment plan and you make all regular payments on your secured debts.
However, if your income or property increases during the life of your plan , the trustee can seek to amend your plan to pay your creditors a greater percentage of what you owe them rather than the lesser percentage originally called for in your plan. The trustee might also be involved if your income decreases and you find you have to convert from Chapter 13 to Chapter 7.
For more information about both Chapter 7 and 13, read the self-help book The New Bankruptcy: Will It Work for You? by Attorney Cara O’Neill .
How To Avoid The Sale Of Your Property By A Chapter 7 Trustee
It may come as a surprise to many involved in bankruptcy that the Chapter 7 Trustee is in control of all assets of the bankruptcy estate. That estate include all legal or equitable interests of the debtor in property as of the commencement of the case as well as any community property of the debtor and their spouse . 11 U.S.C. § 541-.
Perhaps the asset that debtors have the most connection with is their house. Unfortunately, a Chapter 7 trustee can, and most likely will, sell your home if they can derive value for creditors. Indeed, it is the duty of the trustee to collect and reduce to money the property of the estate for which such trustee serves.. 11 U.S.C. § 704. The trustee does so by selling property under 11 U.S.C. § 363.
However, the good news is you might have a number of options to avoid this sale, discussed below. It is important to consult an experienced bankruptcy attorney to weigh the costs and benefits of these options.
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Avoiding Certain Transfers Or Security Interests
The bankruptcy trustee also has certain powers to avoid any preferential transfers or improperly executed security interests. If you transferred property to someone else or paid back certain creditors you prefer over others before filing bankruptcy, the trustee may be able to avoid these and get the money or property back to distribute it among all your creditors.
Similarly, if a creditor did not properly create a lien or security interest on your property, the trustee can avoid that as well and sell the property free and clear of the lien. This situation is unusual. It’s most likely to happen if a friend or family member is the creditor and fails to prepare the loan documents properly or record the lien.
Closing Your Bankruptcy Case
Your trustee only has control of your estate until the bankruptcy is complete. However, if something was in progress during your bankruptcy and you dont collect the money until later, your trustee could still gain access to it.
For instance, if youre in the process of suing someone before or during your bankruptcy, and you dont receive the compensation until years after your bankruptcy is complete, the trustee could still take the money. If the asset existed on the date the bankruptcy was filed, it is considered part of the bankruptcy estate.
The important thing to remember is that discharge does not mean your bankruptcy case is over, nor does it end the trustees control.
If you have assets that need to be liquidated and distributed to creditors, your bankruptcy case could potentially remain open for years. The trustee remains in control until a no-asset report is filed and the case is officially closed.
You are responsible for making sure your case is closed. Dont assume that once youve received a discharge that things are complete. Sometimes, its even necessary to make a request to the court for the trustee to decide whether an asset will be abandoned and returned to you. Working closely with your bankruptcy attorney will ensure all of the loose ends are tied up and you are able to move forward with your life in complete financial freedom.
To learn more about the trustees role in bankruptcy, check out this article from FindLaw.com.
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Are You Getting A Refund
Refunds that are issued as a result of returns for years prior to the year of bankruptcy are considered to be the property of the estate in bankruptcy. As a result, these refunds will be sent to the trustee. Any refunds issued in relation to returns for years subsequent to the year of bankruptcy will be sent to you, unless the trustee has obtained a court order.
For the year of bankruptcy, any issued refund related to the pre-bankruptcy return will be sent to the trustee. Issued refunds related to the post-bankruptcy return will also be sent to the trustee if your bankruptcy assignment date is July 7, 2008, or later. Post-bankruptcy refunds that are issued for bankruptcies with an assignment date prior to that will be sent to you, unless the trustee has obtained a court order or has provided us with an Authorization and Direction letter.
Who Do Bankruptcy Trustees Work For
They donât really work âforâ anyone but theyâre appointed and regulated by the U.S. Trustee Program, a division of the Department of Justice. Each district has a number of Chapter 7 trustees, called the trustee panel. Chapter 13 trustees are considered âstanding trusteesâ because they have a standing appointment to handle all Chapter 13 cases in their judicial district. Large states can have multiple Chapter 13 bankruptcy trustees, but itâs also not uncommon for a single trustee to handle all Chapter 13 cases in a single state.
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A Creditors Perspective: The Bankruptcy Trustee: Friend Or Foe
The bankruptcy trustee is charged with the administration of all bankruptcy cases to which she or he is elected or appointed to serve. The duties of the trustee are generally two-fold: 1. Administer the debtors assets and 2. Investigate the financial affairs of the debtor. In a typical liquidation case most all chapter 7 cases the cash resulting from the sale of the assets or recoveries from clawback claims is distributed to creditors after the payment of the cost of administering the case. To enable the trustee to efficiently administer the assets, the bankruptcy law confers broad powers upon the trustee.
As a creditor you should be aware of the trustees role, powers and how the trustee can affect your rights.
What Information Are You Required To Give To The Trustee
In the Southern District of Ohio, there is a complete list of the documents debtors much provide, in advance, to the trustee in every bankruptcy case filed. These are court orders, called local rules. At a minimum, youll have to provide bank records, car titles, deed and mortgage, retirement account info, life insurance information, and at least 6 months of income proof, as well as tax returns. There could be more required of you once the trustee sees this information.
In my office we have an elaborate system of checklists and inspections to be sure we have all of this information. We carefully review it, to see if there is anything present that might create a problem for our clients. Sometimes we spot things that raise questions. You never want to go into the meeting with the trustee unprepared!
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