When a chapter 7 petition is filed, the U.S. trustee appoints a "disinterested" (that is, impartial) case trustee to administer the case and liquidate the debtor's nonexempt assets. Specifically, the trustee has the duty, under 11 U.S.C. §704(a)(1), to take possession of and sell all of the debtor’s property that is not exempt and use the sale proceeds to pay the unsecured creditors (that is, creditors who extended credit based only on an evaluation by the creditor of the debtor's ability to pay, as opposed to secured creditors, whose extension of credit was based additionally on the creditor’s right to seize collateral on default).
In most cases, however, the debtor has no assets above the statutory exemption limits (for example, the exemption limit for jewelry is $1,350; for household goods, furnishings, and appliances it’s $10,775), meaning that the debtor may "exempt", and therefore keep, all of his assets. If all the debtor's assets are exempt or subject to valid liens, the trustee will normally file a "no asset" report with the court, and there will be no distribution to unsecured creditors.
Most chapter 7 cases involving individual debtors are in fact "no asset" cases. But if the case appears to be an "asset" case at the outset, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. A governmental 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.
The filing of a bankruptcy case creates a "bankruptcy estate." This bankruptcy estate technically becomes the temporary legal owner of all of the debtor's property. It consists of all legal or equitable interests of the debtor in property as of the commencement of the case, including property owned or held by another person if the debtor has an interest in the property. It is the trustee’s function to "administer" the estate by taking the debtor's nonexempt property, if there is any, and liquidating it, and then using the funds to make payments to all creditors who have properly filed their proof of claim.
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. The trustee accomplishes this by selling the debtor's nonexempt property (along with any property having a value that exceeds the exemption claimed by the debtor on it) if it is free and clear of liens (or if it has a value that exceeds any security interest or lien attached to it).
The trustee may also attempt to recover money or property under the trustee's "avoiding powers." The trustee's avoiding powers include the power to "avoid" (that is, set aside) "preference" payments (that is, payments to creditors within 90 days before the petition or to "insiders" made within 1 year prior to filing), to undo security interests and other prepetition transfers of property that were not properly perfected under nonbankruptcy law at the time of the petition, and to 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.
Understanding the role of the trustee, as well as the extent of his or her powers under bankruptcy law, is key to a successful Chapter 7 filing (that is, one that results in a discharge and with the debtor keeping all or as many of his assets as possible). It is vitally important to anticipate potential actions by the trustee and, wherever possible, to avoid the trouble those actions can precipitate for the debtor by proper planning before the Chapter 7 petition is filed.
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