When you file for bankruptcy, the court appoints a bankruptcy trustee to oversee your case. The trustee will review your paperwork and supporting documents before conducting the 341 meeting of creditors—the hearing all filers must attend. At the meeting, the trustee will ask you questions under oath about any red flags raised by your bankruptcy paperwork that indicate that you're hiding or misrepresenting assets.
Find out more information on how the trustee conducts the 341 meeting of creditors.
The following are common red flags the trustee will ask about at the meeting of creditors.
In both Chapter 7 and Chapter 13 bankruptcy, the value of property matters—primarily because of the rule that entitles unsecured creditors to an amount equal to your nonexempt property. (Nonexempt property consists of assets you can't protect with a bankruptcy exemption.) 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 own—but 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. Or—and this does happen—an ex-spouse or ex-business partner might claim that you're hiding especially valuable property. Expect the trustee to follow that tip.
The trustee will also review your income calculations to ensure that you're qualified for Chapter 7 bankruptcy, or that you are paying all of your disposable income into your Chapter 13 repayment plan. The trustee will compare your bankruptcy petition disclosures to the supporting documents you're required to turn over, such as paycheck stubs and tax returns. If your income doesn't match your reported figures, or if you inaccurately report side business profits, you can expect some pointed questions.
The trustee will also look at the expenses you disclose on Schedule J and on the bankruptcy means test. The trustee is checking for reasonability. A trustee who thinks your expenses are too high will object to your Chapter 7 bankruptcy, or argue that you can afford to pay more in Chapter 13 bankruptcy.
A trustee can avoid (cancel) preferential payments made to creditors shortly before bankruptcy. A preferential payment will arise when a debtor pays back a debt to a family member within the year before the filing. Other preferred creditor payments can occur within 90 days before filing.
A trustee who determines that you made a preferential payment can get that money back for the benefit of all your creditors. In practice, if you don't want the trustee to shakedown your grandma for loan payments, you'll likely end up paying the money back yourself.
Learn more about preferential debt payments in bankruptcy.
Any recent transfer of property can raise a red flag and prompt further questioning. For instance, if you give away or transfer property within two years of your bankruptcy, you must disclose it on your statement of financial affairs form. Depending on the specifics of the transfer and whether you intended to defraud your creditors, the bankruptcy trustee might:
Defrauding creditors in this manner involves taking steps to pay them less than what they're owed. For more information, see Bankruptcy Clawbacks: Preferential & Fraudulent Transfers.