What Does the Bankruptcy Trustee Investigate?

What Does the Bankruptcy Trustee Investigate?

Every person considering filing Chapter 13 bankruptcy or Chapter 7 bankruptcy is concerned about running afoul of the trustee. You’ve probably heard that the trustee has the power to seize your assets or dismiss your case. This is true, under certain circumstances.

Learn from noted Philadelphia bankruptcy lawyer David M. Offen who the bankruptcy trustee is, what their duties are, how and when you and your attorney interact with the trustee, and how your bankruptcy lawyer helps you navigate the bankruptcy process and provide everything the Trustee requires so that you have a successful bankruptcy filing.

Call us if you have any questions. You can discuss your concerns with us free of charge. We have over 20 years of experience helping our clients satisfy the Trustee and successfully complete their bankruptcy case. We can help you too.

What the Bankruptcy Trustee Is

A bankruptcy Trustee is an officer of the Department of Justice appointed by the United States Trustee to represent each debtor’s estate in their bankruptcy proceeding. Bankruptcy Trustees evaluate debtors’ cases and investigate, make recommendations, and take action in accordance with the United States Bankruptcy Code.

What a Bankruptcy Trustee Investigates in Chapter 7

The Chapter 7 Trustee has many duties, among them inspecting the debtor’s filing, inspecting creditors claims, confirming the identity of the debtor, and holding the 341(a) Meeting of Creditors. Without the approval of the Chapter 7 Trustee, no one can complete a Chapter 7 case and receive a discharge. These are the questions that trip up Chapter 7 debtors the most:

Did the Debtor Pass the Chapter 7 Means Test?

The Chapter 7 Trustee’s first obligation is to confirm that the debtor is eligible to file Chapter 7. The Trustee examines the debtor’s completed and filed means test as well as the financial information and documentation the debtor provides. If the Chapter 7 Trustee has concerns or requires further information or documentation, they will contact the debtor’s attorney or ask for what they require at the 341(a) Meeting of Creditors.

If the Chapter 7 Trustee finds that the debtor is ineligible to file Chapter 7, they will recommend either case dismissal or case conversion. That is why before you file for Chapter 7 your attorney wants to make sure that you pass the means test, or have very special circumstances that would permit the Chapter 7 to proceed even if you do not pass the means test.

Does the Debtor Have Nonexempt Assets?

Another of the Chapter 7 Trustee’s primary duties is to protect the interests of creditors. If the debtor’s attorney has applied all applicable exemptions and there are non exempt assets left over, the Chapter 7 Trustee has the power to seize and sell those assets for the benefit of the debtor’s creditors. If there are no such assets, the Trustee files a Notice of Abandonment with the court. If there are no non-exempt assets that you wish to keep, then your attorney may recommend that you file for bankruptcy protection under Chapter 13.

Is the Debtor Entitled to Chapter 7 Discharge?

The final and perhaps most crucial step the Trustee takes is to determine whether the debtor is entitled to a discharge. The Chapter 7 Trustee may object to discharge if:

• The debtor has previous recent bankruptcy filings
• The debtor filed bankruptcy in bad faith (example: to unreasonably delay creditor action)
• The debtor lied on their petition or schedules
• The debtor lied under oath at the 341(a) Meeting of Creditors
• The debtor failed to disclose income
• The debtor failed to disclose assets
• The debtor attempted to conceal or destroy property
• The debtor incurred debt fraudulently
• The debtor incurred debt in contemplation of filing bankruptcy
• The debtor failed to cooperate with the Trustee’s requests 

What a Bankruptcy Trustee Investigates in Chapter 13

In addition to what the Chapter 7 Trustee investigates, a Chapter 13 Trustee must verify that the debtor has sufficient income to fund their plan, that the debtor’s creditors are receiving as much through the plan as they could have gotten had the debtor filed Chapter 7 and had nonexempt assets, and the value of any property affected by the plan, such as a car or real property.

What a Bankruptcy Trustee Has Access To

A bankruptcy Trustee has access to the debtor’s complete filing and has the power to demand just about any kind of supporting documentation of the debtor. The Trustee can also subpoena third parties to testify under oath about the debtor’s finances. Because the Trustee has wide-ranging power, there is little a debtor can do to hide income or assets or cover up fraudulent behavior.

Failing to Divulge Information in Bankruptcy

Failing to divulge all financial information in their bankruptcy filing is the most common way debtors fall afoul of the Trustee. Often what looks like fraud or nondisclosure to a Trustee is simply a mistake or oversight by the debtor. 

An experienced bankruptcy attorney helps a debtor avoid any such question or allegation by discussing their financial situation in detail and planning well in advance of actually filing. 

Things Bankruptcy Trustees Look for at the Meeting of Creditors

The Trustee requires proof of identity such as a driver’s license and Social Security card, and will ask some or all of the following questions, among others:

• Is the address on the petition your current address?
• Is the signature on the petition, schedules, statements, and related documents your own (pointing to your filed documents)?
• Did you review these documents before you signed them?
• Are you personally familiar with the information contained in your filing?
• Is the information contained in your filing true and correct to the best of your knowledge?
• Are there any errors or omissions in your filing that you want to bring to my attention at this time?
• Are all of your assets identified on the schedules? 
• Have you listed all of your creditors on the schedules?
• Have you previously filed bankruptcy? If so, when?
• Who is your current employer?
• What is the address of your current employer?
• What do you do for your employer?
• Have you filed any amendments to the recent tax returns you provided to me?
• Do you have a domestic support obligation? If so, to whom?
• Are you current with your domestic support obligation?
• Have you read the Bankruptcy Information Sheet?
• Do you own or have any interest whatsoever in any real estate?
• Have you made any transfers of any property or given any property away within one year prior to filing bankruptcy? 
• Does anyone hold property belonging to you?
• Do you have a claim against anyone or any business?
• Are you the plaintiff in any lawsuit?
• Are you entitled to life insurance proceeds?
• Are you entitled to an inheritance?
• Does anyone owe you money?
• Have you made any large payments to anyone including family in the year prior to filing?
• At the time of the filing of your petition, were you owed a tax refund from the federal or state government?
• Do you anticipate that you might realize any property, cash or otherwise, as a result of a divorce or separation proceeding?

If the Trustee is dissatisfied with any response, they have the power to reschedule the 341(a) Meeting and demand additional information or documentation. 

What if Creditors Show Up at the 341(a) Meeting?

Creditors have the right to appear at the meeting and ask questions of the debtor under oath. This can happen if a creditor suspects that the debtor incurred debt fraudulently, asserts that a debt listed as unsecured is actually secured, or is hiding income or assets. For example, an ex-spouse may appear and ask the debtor about undisclosed income or assets, or a business partner of the debtor may appear to ask about company property or funds. 

The debtor must answer the creditor’s questions truthfully or risk federal prosecution for lying under oath. Depending upon who the creditor is and what questions they ask, the creditor may take additional actions against the debtor such as filing an objection to discharge or an adversary proceeding to determine that the debt is nondischargeable. 

If a Bankruptcy Trustee Suspects Fraud

If a Trustee suspects fraud either through their own assessment of the debtor’s case or through the debtor’s responses to creditor questions, they have a number of ways to investigate and take action against the debtor, if warranted.

Rule 2004 Examinations

If a Trustee suspects fraud but does not yet have the evidence they need to object to discharge or move to dismiss a debtor’s case, they can compel the debtor to testify or to produce documents during an examination of the debtor allowed by Bankruptcy Rule 2004. The Trustee may ask about anything and everything having to do with the debtor’s filing, financial behavior before and during their bankruptcy case, and testimony under oath.  

Objections to Discharge

If a Trustee finds any evidence that the debtor is not entitled to a discharge, they may file an objection. Such evidence may fall short of fraud but may show that the debtor had a previous discharge shortly before filing this case, or that the debtor did not pass the means test.

Adversary Proceedings

If the Trustee finds evidence to support a finding of fraud, they may file a lawsuit against the debtor or a third party within their bankruptcy case. This lawsuit is called an adversary proceeding. 

Again, two of the primary duties of the bankruptcy Trustee is to determine whether the debtor is entitled to discharge and to protect the interests of the debtor’s creditors. To these ends, the Trustee may ask the bankruptcy court to:

• Reverse prepetition preferential transfers
• Set aside prepetition fraudulent transfers 
• Obtain hidden or undisclosed property owned by the debtor 
• Revoke discharge if the debtor failed to disclose inheritance or other windfall received shortly after their bankruptcy case closed
• Obtain property or funds from employees or officers who have wrongfully taken assets of a business that filed bankruptcy
• Recover property that has been wrongfully seized by creditors

Refer Bankruptcy Crimes to the Office of the United States Trustee for Prosecution

Bankruptcy fraud is a federal crime punishable by fines and incarceration. Examples of bankruptcy crimes a debtor may commit include:

• Knowingly concealing assets or income
• Lying under oath
• Bribery
• Embezzlement
• Filing a fraudulent petition or schedules

Creditors in a bankruptcy case may also be prosecuted for fraud if they file a false claim or otherwise lie under oath.

The Trustee refers bankruptcy crimes to the Office of the United States Trustee who in turn refers it to the United States Attorney, the Federal Bureau of Investigation (FBI), or other appropriate federal agency for prosecution in federal court.

How a Bankruptcy Lawyer Helps Your Case

This article is in-depth because as someone considering filing bankruptcy, you need to know what you may be in for. Many innocent debtors get caught up in Trustee allegations of wrongdoing or fraud because they did not know what the Trustee would be looking for and failed to plan for that.

Let experienced bankruptcy lawyer David M. Offen guide you through the filing process so that your bankruptcy goes as smoothly as possible. During your initial consultation, Mr. Offen identifies any potential problems that the Trustee might spot and advise you as to how to deal with them in advance. Put his over 20 years of experience to work for you and get a fresh financial start.