Chapter 7 Bankrutpcy

A bankruptcy proceeding under Chapter 7 of the Bankruptcy Code is the most common type of bankruptcy. Also called "straight bankruptcy" or "liquidation," Chapter 7 cases are mostly consumer cases. A trustee is appointed who is responsible for taking possession of the debtor's nonexempt assets, selling them, and distributing the proceeds to creditors. In most Chapter 7 cases involving businesses, a majority of the assets are fully secured and there is nothing for the trustee to sell for the benefit of the estate.

Appointment of an Interim Trustee

In a typical Chapter 7 case, after the debtor has filed the bankruptcy petition and paid the $175 filing fee, the bankruptcy court or U.S. Trustee appoints an interim trustee. Usually the interim trustee is an attorney or accountant with experience in bankruptcy.

A creditor who is dissatisfied with the interim trustee selected by the court or the U.S. Trustee should consult counsel and other creditors in the case about electing a trustee at the first meeting. The first meeting of the creditors is called the "341 meeting," after the section of the Bankruptcy Code that requires it.

Interim Trustee's Duties

The interim trustee's duties are as follows:

• Review the file and take possession of any assets that are unencumbered and subject to immediate depreciation.
• Preside at the 341 meeting.

Trustee's Duties

Occasionally, at the 341 meeting creditors elect a new trustee. If no trustee is elected, the interim trustee becomes the trustee. The trustee's duties are as follows:

• Sell any unencumbered, nonexempt assets of the estate and distribute the proceeds to creditors according to the priorities specified in the Code.
• Investigate the financial affairs of the debtor, examine proofs of claim and object to their allowance, and occasionally oppose the discharge of the debtor.
• Investigate possible claims for preference recovery and fraudulent transfer.

Trustee's Compensation

Trustees are paid $60.00 per case, plus a percentage of the assets distributed to creditors. They also are entitled to reimbursement of administrative expenses from the estate. Types of expenses reimbursed vary from fees for lawyers, accountants, and realtors, to the costs of preparing assets for sale and sale notices.

Source: "Manual of Credit and Commercial Laws," edited by Charles M. Tatelbaum and John K. Pearson, available at the NACM Bookstore.