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The U. S. Trustee--Administrator and Enforcer
You hear in bankruptcy about the “trustee,” and maybe about the “U.S. Trustee.” They’re clearly easy to confuse. Who’s the U.S. Trustee?
In most consumer bankruptcy cases you hardly hear about the United States Trustee. But when you do, it can mean trouble. So it’s important to understand who the U.S. Trustee is and what that office does in your Chapter 7 case.
U.S. Trustee Mission
The mission of the United States Trustee Program is “to promote the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders – debtors, creditors, and the public.”
The key words are “integrity” and “efficiency.” The U.S. Trustee’s job is to keep the system honest, and make it run smoothly.
That sounds innocuous.
The Administrator
Starting briefly on the efficiency side, the U.S. Trustee appoints and supervises the Chapter 7 trustees. In effect the U.S. Trustee is the boss of the trustees. (Those are the individuals assigned, one to each case, to determine if there are any available assets to liquate and pay creditors, among other responsibilities.)
5 More Things to Know to Protect Your Property through Exemptions
There’s a lot more to using property exemptions than just matching them to your assets. There are benefits worth taking advantage of.
Here are some other important ways that property exemptions work in bankruptcy to protect what you own:
#6. The difference in exemptions under Chapter 7 and Chapter 13:
Your available property exemptions are the same in either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts.” But the exemptions are used very differently in each.
Under Chapter 7, the exemptions determine whether you can keep everything you own. Chapter 7 is a “liquidation” form of bankruptcy. The bankruptcy trustee’s job is to determine whether you own anything that can be liquidated on behalf of your creditors. (See Section 704(a) of the U.S. Bankruptcy Code.) Usually you don’t because everything you own is covered by the available exemptions. But that’s why all your assets need to be matched up with exemptions to protect those assets.
5 Things to Know to Protect Your Property through Exemptions
Most of the time you get to keep everything you own when you file bankruptcy. It’s all covered by property exemptions. But not always.
Here’s how property exemptions work in bankruptcy to protect what you own:
#1. The basic rule:
You get to keep everything you own as long as it all fits within “property exemptions.” These are categories of assets—each usually with a maximum dollar amount—that you are allowed to have. See Section 522 of the U.S. Bankruptcy Code.
But there is a lot more to this than just matching assets to exemptions. What is and is not covered by some exemption categories is not always clear. In many states you get to choose between a federal and a state set of exemptions. You have to know which state’s exemptions apply to you if you’ve moved recently. Applying these laws often requires knowing how the state and federal statutes have been interpreted in court decisions, and/or how the local trustees and judges are enforcing them.
Using the Right Set of Property Exemptions
Usually you use the property exemptions available for the residents of your state. But not if you haven’t lived there long enough.
Property Exemptions in Chapter 7 Bankruptcy
In most consumer Chapter 7 “straight bankruptcy” cases you get to keep everything you own. That’s because everything you have fits within the property exemptions that are available for you to use.
To make sure that happens you need to:
- know what set of exemptions you are allowed to use
- apply the right exemption to each asset
- determine whether the dollar values of your assets fit within the maximum allowed values of the applicable exemptions
For example, if you own a guitar which has a fair market value of $500 you need to:
- know which set of exemptions are available to you as a residents of your state
- see whether that set of exemptions includes one specifically for musical instruments, or for some broader category such as “personal effects” which could include your guitar
The Chapter 7 Trustee Challenging an Asset's Value
What happens when your bankruptcy trustee thinks you undervalued an asset? How does the trustee determine what you own and its value?
Last time, we got into what happens when your asset (“property) and exemption schedules show you have an unprotected asset. In that scenario you own something that is not covered by an allowed exemption. So it is not exempt from the Chapter 7 trustee’s reach.
We mentioned two other scenarios. What happens if:
- the trustee believes you may have undervalued an asset, or
- the trustee disputes that an exemption you claimed applies to your asset?
We’ll cover the first of these two today, and the second in our next blog post.
Your Valuation of Assets
The starting point for what your assets are worth is the value you give to them in your asset schedule. That form asks for the “current value” of the property.
The Chapter 7 Trustee Looking into an Asset
What happens when something you own is not or may not be exempt (protected)? What does the trustee do about this and what is the end result?
Chapter 7 is the “liquidation” form of bankruptcy. But in our last blog post we introduced the bankruptcy trustee as an only sometimes liquidator. That’s because in most Chapter 7 cases nothing gets liquidated. Nothing gets taken from you and sold to pay your creditors. And that’s because most of the time everything you have is “exempt,” protected.
But what happens when you own something that is not covered by your allowed property exemptions?
One of two things will happen. The trustee looks into it and decides your asset is not worth liquidating after all. Or he or she may decide it is worth liquidating. We cover the first situation today, the second one in an upcoming blog post.
Three Scenarios
The Trustee in a Consumer Chapter 7 Case
Besides your creditors, the main person you need to be careful about in a “straight bankruptcy Chapter 7 case is the trustee. Who’s that?
The Trustee Is a Liquidator, Sometimes
Chapter 7 is sometimes called the “liquidation” kind of bankruptcy. But in most consumer cases no liquidation—the selling of assets—happens. That’s because usually everything the debtor owns is “exempt”—protected from liquidation.
The Chapter 7 trustee is the official who determines if a debtor has any assets that are not exempt. If so, the trustee takes possession of them, sells them, and distributes the proceeds to the creditors.
Information for the Trustee
The main source of information for the trustee about your assets is the paperwork you provide him or her. Most of that is in contained in the documents you and your lawyer prepare and file at the bankruptcy court. You also provide some verifying documents to the trustee directly.
Resolving a Fraudulent Transfer Painlessly through Chapter 13
If you owe “priority” debts like income taxes and/or support payments, you may be able to pay no more to protect a transferee.
Let’s follow up on something we said in our last blog post two days ago. We showed how you can use a Chapter 13 “adjustment of debts” case to resolve a fraudulent transfer. Essentially, you pay extra into your Chapter 13 payment plan to make up for doing the fraudulent transfer. In the example we used, the debtor would pay a $225/month plan payment for about 22 extra months to make up for the $5,000 vehicle he or she’d had given away a year before filing bankruptcy.
But we ended that blog post by saying that under certain circumstances the results may be better. We show you how today.
Turning Lemons into Lemonade
Chapter 13 has a knack for solving two financial problems by setting them off against each other.
The first problem: the fraudulent transfer. You gave your friend your spare car a year ago because she desperately needed reliable transportation to commute to work. She now still needs it just as badly, so you don’t want a bankruptcy trustee to take it from her.
Preventing Avoidance of Fraudulent Transfers through Chapter 13
Overall, Chapter 13 can be more powerful and more flexible than Chapter 7. That often also applies to a fraudulent transfer.
The Problem
Our last four blog posts have been about so-called fraudulent transfers. Today we look at a way to possibly avoid the hassles caused by a fraudulent transfer.
A fraudulent transfer is a sale or gift of an asset you made during the two years before filing bankruptcy case, a sale or gift that can be undone (“avoided”) during your case. (See our post of Monday of last week introducing fraudulent transfers.)
Consider this example. A year before filing bankruptcy you gave a friend a second car you didn’t need and she desperately did. Now a year later, there is a good chance that your bankruptcy trustee could make her surrender that car. Under certain conditions the trustee would take it, sell it, and pay the proceeds to your creditors.
Your direct intention when you gave her the car a year ago could have been to keep that car from your creditors. Or you could have given her the car with no such intent, but instead only wanting to help your friend. However, even without any intent to hinder your creditors, the gift could be a trustee-avoidable fraudulent transfer.
Are Charitable Gifts Fraudulent Transfers?
Charitable donations made during the two years before filing bankruptcy may fall within a safe haven of not being fraudulent transfers.
The Quick Answer
To answer the question in the title directly, charitable gifts you make before filing bankruptcy COULD be fraudulent transfers. But they are not if they fit within a significant but limited exception that Congress has carved out for legitimate charities.
A Very Helpful Exception
This is important. Your bankruptcy trustee has the power, under many circumstances, to require someone you gave a gift to within the two years before filing bankruptcy to return the gift, not to you but to the trustee for distribution to your creditors. Imagine a friend, relative, your church, or other charity being ordered to return whatever money or goods you donated! Instead of your good intentions being realized, that money is used to pay the debts you’d hoped to write off.
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