Red Flags the Bankruptcy Trustee Looks for at the Meeting of Creditors

Learn about some of the things the bankruptcy trustee will watch out for during your meeting of creditors.

When you file for bankruptcy, the court appoints a  bankruptcy trustee  to oversee your case. In addition to reviewing your bankruptcy papers, the trustee’s primary responsibility is to administer your bankruptcy estate and uncover nonexempt assets or additional income that can be used to pay back your unsecured creditors. The trustee does much of this fact finding by asking you questions under oath and looking for certain red flags at the meeting of creditors (also called the 341 hearing). Read on to learn more about what the trustee looks for at the meeting of creditors.

For more information on how the trustee conducts 341 hearings, see this article on  The Meeting of Creditors.

Red Flags the Trustee Looks for at the Meeting of Creditors

The following are some of the most common red flags the trustee will look for at the meeting of creditors.

Undisclosed or Undervalued Property

In both Chapter 7 and Chapter 13 bankruptcy, the value of your property matters. In Chapter 7 bankruptcy, the trustee has the power to liquidate your nonexempt property to pay your unsecured creditors. In a Chapter 13, the “best interest of creditors test” requires that you pay your unsecured creditors at least the value of your nonexempt property through  your repayment plan.

This means that the trustee will question you about all of the assets you own and what they are worth. If you fail to disclose an asset or underestimate its value on your paperwork, it will raise a red flag with the trustee.

Income Doesn’t Match Your Pay Stubs

The trustee reviews your income calculations carefully to make sure that:

  • you qualify for Chapter 7 bankruptcy, and
  • you are paying all of your disposable income into your repayment plan in Chapter 13 bankruptcy.

You must provide the trustee with certain supporting documents (such as your pay stubs and tax returns) to verify the income figures disclosed in your bankruptcy paperwork. If the trustee sees that your income doesn’t match your pay stubs, he or she will question you about it in more detail.

Excessive Expenses

The trustee will also look at your expenses on  Schedule J  and the  bankruptcy means test  to determine whether they are reasonable. If the trustee thinks that your expenses are unreasonably high, he or she can object to your Chapter 7 bankruptcy or argue that you can afford a higher monthly plan payment in Chapter 13 bankruptcy.

Recent Payments to Creditors

In some circumstances, the trustee may avoid (cancel) certain payments (called preferential payments) made to creditors shortly before bankruptcy. In most cases, a preferential payment arises when a debtor pays back a debt from a family member or other preferred creditor prior to filing for bankruptcy.

If the trustee determines that you made a preferential payment, he or she can get that money back for the benefit of all your creditors.

To learn more about when the trustee can treat a payment as preferential, see Preferential Debt Payments in Bankruptcy.

Recent Property Transfers

In general, any recent transfers of property can raise a red flag with the trustee and prompt further questioning. If you give away or transfer property within two years of your bankruptcy, you must disclose it on your  Statement of Financial Affairs. Depending on the specifics of the transfer and whether you intended to defraud your creditors, the bankruptcy trustee may be able to:

  • avoid the transfer and get the property back
  • object to your discharge, and
  • refer your case to the U.S. Trustee for criminal investigation.

For more information, see  Bankruptcy Clawbacks: Preferential & Fraudulent Transfers.

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