Although debtors file for bankruptcy in federal court, Chapter 7 and 13 matters rarely go before a judge. Instead, a court-assigned bankruptcy trustee oversees each case as it proceeds through the bankruptcy process. However, the court doesn't pay the trustee—the debtor foots the bill. Here's how it works.
The trustee takes the rowing oar in Chapter 7 and can be rewarded substantially for the effort. In addition to verifying that the debtor passed the Chapter 7 means test and conducting the 341 creditor meeting, the trustee is also responsible for ensuring creditors get paid.
The trustee does this by selling nonexempt property—assets not protected by a bankruptcy exemption—and distributing the proceeds to creditors. For instance, luxury items not needed to maintain a household or employment—such as a Hermes Birkin handbag or a vacation rental in Sri Lanka—would fall into the nonexempt category and be lost to creditors in Chapter 7 "liquidation" bankruptcy.
Learn more about what the Chapter 7 trustee does in a bankruptcy case.
Creditors aren’t the only ones benefiting from the sale of a debtor’s worldly goods—the Chapter 7 trustee gets a cut, too. Specifically:
The payment structure motivates trustees to work diligently to flush out nonexempt assets and preferential and fraudulent property transfers, the potential prize being a substantial payday. (11 U.S.C. §§ 326, 330.)
While a Chapter 7 trustee will typically receive the maximum fee allowed, the court might reduce a trustee's fees if a party objects to the application or if the court believes that the requested fees are not reasonable under the circumstances.
Most Chapter 7 debtors can keep all of their property in what’s known as a “no-asset” case. In these matters, the trustee's only compensation is a nominal administrative fee paid out of the initial court filing fee. If the court grants the debtor a filing fee waiver, the trustee gets nothing.
The Chapter 13 trustee reviews the bankruptcy paperwork and conducts the 341 hearing. But Chapter 13 is a debt reorganization bankruptcy, so the trustee doesn't sell property to repay creditors. Instead, in Chapter 13 bankruptcy you propose to pay back a portion of your debts through a three- to five-year repayment plan in exchange for keeping all of your property. During the Chapter 13 case, the filer makes monthly payments to the trustee according to the terms of the plan, and the trustee distributes the funds to creditors.
Learn more about the role of the Chapter 13 trustee.
Instead of a sales proceed commission, the Chapter 13 trustee receives a percentage of the monthly repayment plan as compensation for administering the case. The percentage the trustee can collect varies by district and is often limited to 10%, and the trustee’s total compensation is capped, as well.