What Does the Bankruptcy Trustee Investigate

What Does the Bankruptcy Trustee Investigate?

What does the bankruptcy trustee investigate? The bankruptcy trustee will look for red flags when reviewing bankruptcy documents. Find out what the bankruptcy trustee is looking for when they investigate.

A bankruptcy trustee is responsible for overseeing a bankruptcy filing. They also play a key role in deciding whether a case will proceed.

The bankruptcy judge will appoint a trustee to search for assets that can be used to repay creditors. This includes examining your finances in depth if you have filed for bankruptcy.

Although trustees are neutral, they have a primary duty to ensure that creditors are paid the maximum amount possible. The trustee will check your income, assets, and property to see if you have hidden assets.

The trustee’s specific search depends on whether you filed a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. These are the two most popular types of bankruptcy. The trustee will compare the paperwork (officially called “the schedules”) you submitted with your financial records and any other relevant information.

A bankruptcy trustee has the experience to spot red flags which can lead to dismissal or fraud charges. It makes sense that if you declare bankruptcy, you should be honest with your debts and assets. It is often crucial to the success of your case.


What Is a Bankruptcy Trustee?

Officially, the trustee is an officer of the U.S. Department of Justice under the Office of the U.S. Trustee.

No matter which chapter is filed in a bankruptcy, the bankruptcy court will appoint a trustee who will assess the estate. The trustee reviews the case and makes a recommendation on whether to proceed. If so, he administers it.

The trustee’s job is to conduct an independent investigation into the bankruptcy case and to litigate any issues if the case does not comply with bankruptcy law. They also administer funds according to the orders of the bankruptcy court.

Bankruptcy trustees must have legal and financial expertise to understand the bankruptcy process. Many bankruptcy trustees do have a law degree, even though it is not required. 


What Is a Bankruptcy Trustee’s Job?

The role of a bankruptcy trustee varies depending on the type of bankruptcy. In both cases, they examine all documents filed and investigate a person’s income and assets. The trustee makes a recommendation as to whether or not the case should be taken forward. They will then administer the case and make payments to creditors if it is approved.

All people who file for bankruptcy are required to disclose all financial information including income and assets. Both Chapter 7 trustees as well as Chapter 13 trustees verify the accuracy of the information in the bankruptcy schedules and plan. This investigation helps to maintain the integrity and fairness of the bankruptcy system.

The meeting with creditors is a major component of the investigation. This hearing, known officially as a 341 Hearing, is regarded as an important part. In both Chapter 7 bankruptcy and Chapter 13 bankruptcy, the trustee facilitates this meeting. He reviews all debts and documents and decides what creditors will receive.

The trustee is appointed by bankruptcy courts and can only act if the court approves. However, their recommendations are very important.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” is a bankruptcy in which assets are liquidated for the purpose of paying off unsecured debt. Most people who file Chapter 7 retain most of their assets. This includes their home, their car, and any other items necessary for their daily lives. In 2022, nearly 70% of personal bankruptcies will be Chapter 7.

Chapter 7 trustees are responsible for finding assets. According to a court order, assets are sold and the proceeds are paid to creditors.

The Chapter 7 petitioner must pass the means test to determine if they can pay off their unsecured debts (credit cards and medical bills). If they pass the means test, the non-exempt property is sold, and the proceeds are used to pay the trustee, administrative fees, and creditors. The trustee will determine what property is exempt, and then investigate to ensure that all assets and non-exempt items are listed.

Chapter 13 Bankruptcy

Rucinksi stated that Chapter 13 trustees don’t sell assets. According to a court order, Chapter 13 filers make monthly payments to a trustee. The funds are then distributed to their creditors. This repayment plan allows people the opportunity to keep their homes, cars, and other assets.

Chapter 13 bankruptcy is a payment plan that the bankruptcy court sets up. After the plan has been completed (which only half of those filing Chapter 13 do), the remaining unsecured debt will be discharged. In 2022 29% of those filing for bankruptcy will choose Chapter 13. Most people file Chapter 13 when they do not pass the Chapter 7 test. The trustee will look for this at the meeting of creditors during the investigation phase.

A Chapter 13 Trustee:

  • Make sure the person filing for bankruptcy has enough money to pay off their debts.
  • Ensure that the creditors get the same amount of money they would get if the person’s assets were sold in a Chapter 7 bankruptcy case.
  • Collects monthly payments from the individual
  • Pays creditors


What Does the Trustee Look for in Bankruptcy Schedules?

The bankruptcy trustee will investigate every aspect of the debtor’s financial history to determine how much money is available for payment. The trustee examines the bankruptcy schedules, which are the legal documents filed by the debtor, and compares them to tax forms, pay slips, bank statements, and any other evidence of money or property. The trustee will review the budget of the debtor to ensure that money is not being spent on items that might be owed to creditors.

Also, they look at previous bankruptcy filings. If a case is dismissed, a person can file for bankruptcy within 180 days. However, if their debts are discharged through bankruptcy, they will have to wait longer. If a person’s debt was discharged by a Chapter 7 bankruptcy, they must wait up to eight years before filing Chapter 7 again. They will also have to wait four years to file Chapter 13 if their debt has been discharged. After completing a Chapter 13 bankruptcy, a person must wait six years before filing Chapter 7 and another two years for Chapter 13.

The trustee will be looking for completeness in the schedules before the bankruptcy is allowed to proceed.

Non-Exempt Property

Exempt property in a Chapter 7 bankruptcy is any asset you have, including income that is essential for you to survive and get back on your feet after bankruptcy. These assets are exempt from being liquidated. Exemptions from bankruptcy can include your home, car, equipment for work, pension payments, and Social Security. Chapter 7 bankruptcy cases are often “non-asset” cases. This means that there is no nonexempt property and the individual filing does not lose anything. Non-exempt goods are those that are both unnecessary and valuable, and which can be sold or used to pay off debt. 

The trustee will weigh their value when deciding whether liquidating items is worth it. You might keep a painting of your grandmother that is on the wall in your living room. It has sentimental value but would not sell well. It’s likely that if it is by Picasso, it would be included in non-exempt property.

Examples of nonexempt properties include:

  • Cash in bank accounts
  • Stock investments
  • Second home
  • Second car
  • Recreational vehicles like boats, ATVs, and snowmobiles
  • Collections of coins, stamps, or other memorabilia
  • Musical instruments (if you are not a professional musician).
  • Family heirloom
  • Artwork of value
  • Designer clothing and accessories
  • Jewelry

Reversible Transactions

The trustee will examine recent financial transactions to determine if they are reversible, voidable, or claw-back transactions. These are financial transactions that can be canceled so that money can be returned to an estate for payment to creditors. They could be payments made to creditors or money or goods given to relatives or friends. Some people file bankruptcy to conceal assets. 

The trustees can review any transactions made within 90 days of the bankruptcy filing in order to determine if they apply. The trustees can also review certain property transactions or payments made to friends and family a year prior to the bankruptcy filing. If trustees suspect fraud, they may go back as far as necessary if they believe it is needed.

Reversible transactions can be classified into:

  • Gifts of large amount, value, or quantity
  • Transfers at less than the full value
  • Transfers in favor of one creditor


Red Flags Bankruptcy Trustees Look for

Trustees anticipate problems with bankruptcy filings. The debtor is the most affected by this, as it delays the bankruptcy proceeding.

Problems such as inaccurate and incomplete bankruptcy plans or schedules don’t cause any issues for the trustee because the parties can amend their disclosures. The real problem is people who need financial assistance and have filed for bankruptcy can be denied it until their plans and schedules are accurate.

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

It’s not surprising that mistakes and inaccuracies occur when filling out the 23 federal forms and many state forms required to file bankruptcy. Sometimes, omissions can be deliberate.

Bankruptcy trustees are looking for red flags that may indicate dishonesty regarding assets and income. Property categorized as exempt but not exempt, hidden assets, and missing financial information are some of the red flags.

Hidden Assets

Hidden assets are just what they sound like – property or accounts worth more than the amount indicated on documents.

Your schedules may reveal hidden assets.

  • Missing financial records
  • Closed accounts in bank or investments
  • Assets listed are not valued at their true value
  • Assets that are not listed can have debt or expenses
  • Recent Property Transfers
  • A claim property was stolen, but there’s no police report or insurance claim
  • Payment or paperwork to open a safe deposit box
  • Property that “belongs” to a friend
  • No obvious source of income
  • Insurance claims that have not been paid

Property Issues

The trustee will want to ensure that the exempted property is necessary for living or working.

What the trustee looks for:

  • Actual value of the property listed
  • What equipment, tools, vehicles, etc. are needed for work
  • A spouse’s property
  • Recent moves between states

Chapter 13 Bankruptcy Issues

Chapter 13 bankruptcy has its own issues. The person filing must be able to pay the plan and their debts cannot exceed a certain limit.

A Chapter 13 trustee looks at:

  • Schedules of income not included
  • Income of spouse (which is included in the income of the person filing)
  • Over-limit debt
  • Transfer of assets before filing


What Happens If a Bankruptcy Trustee Suspects Fraud

A person can be charged with bankruptcy fraud if they deliberately hide assets, and incomes or misrepresent their finances. This can have serious consequences. A trustee’s role includes looking for fraud.

Even though some deliberate omissions do not rise to the level of fraud, they can still lead to a case being dismissed. If the trustee finds out that there was a previous bankruptcy discharge that wasn’t disclosed or the debtor has too much income, they can object to the discharge of the debts. These are not frauds, but rather the result of not accurately filling out documents or not meeting the criteria for a discharge.

The trustee may refer the case to the U.S. attorney, FBI, or other law enforcement agency if the trustee determines that the person has knowingly concealed income or assets, lied on oath, bribed or embezzled, lied in documents, or made a false claim.

The trustee may use a number of investigative tools to reach that point, including a meeting of creditors (341 Meeting) and an adversary proceeding. This is a lawsuit filed by the trustee when fraud is suspected.

Meeting of Creditors

The meeting of creditors actually takes place between the bankruptcy trustee, and the person filing for bankruptcy. The creditors may be present, but they are usually absent. The purpose of the meeting is to ensure that all forms are accurate and that all assets, incomes, and debts have been accounted for.

The trustee will review the documents with the debtor and discuss the planned payments. Both parties must answer questions under oath. The debtor must verify their name, address, Social Security Number, and current employment information, swear that they have reviewed and signed all documents, and confirm the accuracy of the information. The debtor will be asked to confirm if they have any errors or omissions.

Questions that the trustee may ask:

  • Do you know all your assets?
  • Do you have all your creditors listed?
  • Have you filed for bankruptcy before?
  • Do you have any amendments to your tax return?
  • Are you up to date with your payments? Do you pay alimony or child support?
  • Do you own or have an interest in real estate?
  • Do you have any property transfers made in the last year?
  • Have you made large payments to anyone in the year before filing?
  • Do you own property?
  • Do you want to make a complaint against a person or a business?
  • Are you the plaintiff in a lawsuit?
  • Do you have a right to life insurance proceeds, an inheritance, tax return, divorce, or separation payments?

Adversary Proceedings

Fraud is not limited to the person who files bankruptcy. The investigation of a bankruptcy trustee may reveal fraud committed by a creditor. A trustee can file an adversary proceeding in either case. Nearly 16,000 adversary proceedings are filed in bankruptcy cases each year across the U.S. The suit may be directed at a specific issue, such as asking the bankruptcy court to reverse a property transaction or return property that was wrongfully taken by a creditor. The suit can result in a recommendation to dismiss the bankruptcy or hand the case over to law enforcement.


Other Bankruptcy Trustee Investigative Powers

There are other ways that bankruptcy trustees may investigate a case and lead to a court action, including:

  • Rule 2004 Examination: In a version extended of a meeting of creditors a trustee who suspects fraudulent behavior can ask any questions about finances or financial behavior that they believe may be relevant. The trustee may also request documents to determine if there has been fraud.
  • Inspect Property: A trustee can make an inventory of all the items in the debtor’s house and business. This includes any storage units or safe deposit boxes.
  • Power to Subpoena: The trustee has the power to subpoena witnesses to provide testimony about the financial condition of a debtor.


Talk to an Attorney Before Filing for Bankruptcy

Before filing for bankruptcy, anyone who intends to do so must take a course in credit counseling. The course should be taken no more than 180 days before the filing date. The bankruptcy court will not accept your filing until you produce a certificate proving you have taken the course.

A bankruptcy lawyer can help you put things in perspective if your debt is overwhelming. The lawyer can assist you in finding alternative options that won’t damage your credit but rather improve it.

Ready to take control of your financial future? Contact Bruner Wright, the leading bankruptcy attorney in Jacksonville, FL. Our team of experienced attorneys is here to guide you through the bankruptcy process, ensuring you make the best decisions for your financial well-being. Don’t let overwhelming debt hold you back any longer. Schedule a consultation with Bruner Wright today and let us help you find the right solution to your financial troubles.

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