If you have attended a seminar or read an article about bankruptcy, you have probably heard that the Chapter 7 bankruptcy trustee administers the estate. But what does that mean as a creditor? This article will provide a brief overview of the trustee’s role and when a creditor might interact with a trustee in a bankruptcy proceeding.

After a Chapter 7 bankruptcy case is filed, a trustee is appointed for the debtor’s case.ⁱ The trustee does not represent the debtor or any particular creditor but is charged with overseeing certain aspects of the case according to the duties provided under the Bankruptcy Code. The bankruptcy trustee is frequently an attorney who has significant experience in bankruptcy.

One of the primary tasks of a Chapter 7 trustee is to reduce the debtor’s non-exempt property and claims to funds that can be distributed to creditors. In this way, the trustee is aligned with creditors as a whole — the more property the trustee can recover, the greater the likelihood of a meaningful distribution to creditors. The trustee will review the debtor’s bankruptcy schedules, ask questions of the debtor at the meeting of creditors, and may do additional investigating into potential assets and causes of action.

Given the task of collecting funds for distribution, a creditor may find itself as a target of investigation or litigation by the trustee.

For example, the trustee may request additional documents from a creditor to verify whether a lien was properly perfected. Under 11 U.S.C. § 544(a), the trustee has the power to seek avoidance of liens that a hypothetical lien creditor could. This means that if a lien is unperfected and a judgment creditor would have priority, the trustee can seek to avoid that unperfected lien. The unencumbered property would then be available to liquidate for the benefit of unsecured creditors.

The trustee also has additional powers to seek avoidance of certain transfers and recover them for the benefit of the bankruptcy estate.

Under 11 U.S.C. § 547, payment or transfer of the debtor’s property to a creditor within 90 days of the bankruptcy petition may be recoverable as a preference if the pre-petition payment allowed the creditor to receive more than it would have in the Chapter 7 case. If a creditor received payments within 90 days of the bankruptcy petition, the trustee may send a creditor a demand letter or request additional information to determine whether the creditor has defenses to the potential preference action.

Similarly, under 11 U.S.C. § 544 and 548, the trustee can seek the avoidance of fraudulent transfers. These could be either actual fraudulent transfers or constructive fraudulent transfers where the debtor received less than reasonably equivalent value while insolvent. If a creditor is the recipient of those transfers, it may be on the receiving end of a demand or litigation from the trustee.

In addition to recovering property, the trustee has a duty to examine proofs of claim “if a purpose would be served” and “object to the allowance of any claim that is improper,” according to 11 U.S.C. § 704(a)(5). This means that the trustee may send an inquiry to a creditor or file an objection if the trustee has questions about the creditor’s proof of claim.

As this brief summary shows, the trustee plays a large role in a debtor’s bankruptcy case. The trustee’s work can benefit creditors, but at times, a creditor may be on the receiving end of the trustee’s investigation. If you receive an inquiry from a bankruptcy trustee about your collateral, your proof of claim, or claims against you, contact an attorney who can help you determine the appropriate response.