Chapter 7 bankruptcy is a procedure whereby a debtor seeks to eliminate debt. In exchange, any non-exempt property is sold or “liquidated” for the benefit of his creditors.

Most cases are “no-asset” cases. In those cases, the trustee files a report of no distribution (a “no asset report”) with the Court to indicate there will be no payment to the creditors. In such cases, the debtor keeps all his assets.

In cases where the debtor has non-exempt assets – assets which are not protected from creditors under the applicable state or federal law – the chapter 7 trustee converts these assets to cash and uses the proceeds to pay creditors, after costs of administration of the bankruptcy case.

In all cases, the debtor must attend a meeting of the creditors – sometimes called the 341 meeting after section 341 of the Bankruptcy Code. The bankruptcy trustee presides at this hearing and the debtor is required to answer questions posed by the chapter 7 trustee and sometimes creditors. Usually, this meeting is rather short. Usually after 60 days from the date of the 341 hearing the debtor will receive a discharge which effectively “wipes out” all dischargeable debts.

The debtor may be an individual, married couple, corporation, partnership or trust. The debtor may not have been granted a Chapter 7 discharge within the previous 8 years or a chapter 13 discharge within the prior 4 years. The debtor must not have had a previous bankruptcy dismissed for cause within the last 180 days. The debtor has to have taken credit counseling, if an individual, not less than 180 days prior to the date he files his bankruptcy petition.

In each bankruptcy case under Chapter 7, the United States Trustee appoints as trustee a disinterested person who is a member of a panel of Chapter7 trustees (“panel trustee”) to serve as an interim trustee. In almost every case, the interim trustee will continue to serve as the permanent trustee. Trustees have specific duties as outlined in the Bankruptcy Code. In particular, Trustees examine the Debtor’s overall financial condition. Most trustees make an investigation beyond simply reading the bankruptcy petition and schedules to be sure that the Debtor has disclosed all assets and liabilities.

Chapter 7 Trustees are not government employees. They are private citizens appointed and supervised by the Office of the U.S. Trustee (a division of the U.S. Department of Justice) to administer bankruptcy cases under chapter 7 of the U.S. Bankruptcy Code. Many chapter 7 trustees are also attorneys, accountants or other professionals who continue to practice their profession after appointment to the panel. In the Northern District of Illinois, few of the Trustees consider their work as bankruptcy trustee to be their sole employment.

Each Trustee must pass a FBI background check and is required to post a bond in each case. In the Northern District of Illinois, Trustees who regularly serve are covered by a blanket surety bond.

There are approximately 1,000 Chapter 7 Trustees in the United States. There are fewer than 50 for the entire Northern District of Illinois. Last year, there were over 50,000 cases filed in the Northern District of Illinois, the majority of which were chapter 7 cases.

The United States Trustee, a division of the United States Department of Justice, in cooperation with the Bankruptcy court, insures that a Trustee is selected on a random basis to handle all Chapter 7 bankruptcy cases. A Trustee with a conflict in a specific case may withdraw from that case in which case another Trustee will be appointed. In Chicago, the typical trustee might handle up to 1000 cases in a year.

The specific duties of the Chapter 7 trustee are outlined in section 704 of the Bankruptcy Code.

In an individual case, the Trustee has the right to administer all assets that are not exempt. In some cases, a Trustee may not do so because administration of a particular asset may not be cost effective. As a matter of policy, Trustee David Leibowitz prefers to afford debtor to “buy back” non-exempt assets prior to offering such assets for sale to the public.

Trustees sell assets by private sale or auction. Bankruptcy sales are governed by Bankruptcy Code §363 and Federal Rule of Bankruptcy Procedure 6004.

If the Trustee has assets, creditors are required to file proofs of claim in order to share in them. The Trustee will object to any improper claims. Then, the trustee pays claim in order of priority, after first paying administrative expenses. If all claims are paid in full, with interest, the surplus is returned to the Debtor. This happens more often than might be expected.

Trustees are paid only $60 for each Chapter 7 case. This fee is derived from a portion of the Debtor’s $299 filing fee for a chapter 7 case. In addition to the $60 fee, Trustees may be paid a trustee fee in asset cases depending on the amount of assets collected and disbursed. Panel Trustees are compensated on a commission basis in order to encourage them to maximize the bankruptcy estate. The commissions earned by the Trustee are reviewed by the Court, when requested, to determine if the fees are reasonable.

Trustees get no compensation for handling In Forma Pauperis cases – a case where the debtor can’t afford to pay a filing fee.

The $60 fee a Trustee receives for handling a chapter 7 case has not increased since 1994. Nothing else is the same price it was in 1994.

Many bankruptcy cases have complex assets which require litigation to resolve. In these cases, the Trustee must hire an attorney to handle the litigation on behalf of the estate. Resolution of legal issues through litigation can take many years. A bankruptcy case may be open for some time for the administration of assets even though the Debtor may have already received his or her discharge.

Although I can only speak for myself, I want honest debtors with no assets to receive their discharge promptly after a finding of no-assets. I want debtors to accurately and honestly report their assets and liabilities so that I can efficiently liquidate any non-exempt assets for the benefit of creditors and promptly close the bankruptcy case. I want debtors to perform their obligations under the Bankruptcy Code and to cooperate with me in the performance of my duties. In appropriate cases, reluctantly, I will seek to bar the discharge of dishonest debtors and in rare cases, even more reluctantly, I might even make a criminal referral.