Appointment of Trustee

After a Chapter 7 petition is filed by the debtor in the appropriate court, the United States trustee (or the bankrutpcy court in Alabama and North Carolina) appoints an impartial case trustee to administer the case and liquidate the debtor's nonexempt assets.

If all of the debtor's assets are exempt or subject to valid liens, the trustee will typically file a "no asset" report with the court, and there will be no distribution to unsecured creditors.  A government unit, however, has 180 days from the date the case is filed to file a claim.

In the typical no asset Chapter 7 case, there is no need for creditors to file proofs of claim because there will be no distribution.

If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy Court will provide notice to creditors and will allow additional time to file proofs of claim.  Although a secured creditor does not need to file a proof of claim in a Chapter 7 case to preserve its security interest or lien, there may be other reasons to file a claim.  A creditor in a Chapter 7 case who has a lien on the debtor's property should consult an attorney for advice.

The Estate

Upon commencement of a bankruptcy case, an "estate" is created by law.  The estate becomes the temporary legal owner of all the debtor's property, and consists of all legal or equitable interests of the debtor in property as of the commencement of the case.  This includes property owned or held by another person if the debtor has an interest in the property.  In general, creditors are paid from nonexempt property of the estate.

Role of Trustee

The primary role of a Chapter 7 trustee in an asset case is to liquidate the debtor's nonexempt assets in a manner that maximizes the return to the debtor's unsecured creditors.  One way the trustee accomplishes this is by selling the debtor's property if it is free and clear of liens (as long as the property is not exempt).  Another way is if the property is worth more than any security interest or lien attached to the property and any exemption that the debtor holds to the property.

The trustee may also attempt to recover money or property under the trustee's "avoiding powers."  These powers include the power to:

• set aside preferential transfers made to creditors within 90 days before the petition;
• undo security interests and other prepetition transfers of property that were not properly perfected under nonbankruptcy law at the time of the petition; and
  
• pursue nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law.

In addition, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the business for a limited period of time, if such operation will benefit creditors and enhance the liquidation of the estate.

Distribution of Property in the Estate

The Bankruptcy Code sets forth six classes of claims, and each class must be paid in full before the next lower class is paid anything.  The debtor is only paid if all other classes of claims have been paid in full.  Thus, the debtor is not concerned about the trustee's disposition of the estate assets, except with respect to payment of those debts which for some reason are not dischargeable in the bankruptcy case.  The individual debtor's primary concern in a Chapter 7 case is to retain exempt property and to receive a discharge that covers as many debts as possible.