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What does a trustee do during a Chapter 7 bankruptcy?

When Illinoisans file for Chapter 7 bankruptcy, they have taken their first step towards financial freedom. Along that journey through the bankruptcy process, they will encounter several characters playing specific roles. One of those characters is a bankruptcy trustee. So, what does a trustee do?

A trustee administers the bankruptcy "estate." The estate, in turn, is the temporary legal owner of a debtor's property. In administering the estate, the trustee's main task is to maximize the amount of money that the debtor's creditors receive.

How does a trustee maximize how much money creditors receive? In a couple ways. First, the trustee identifies a debtor's property and then sells off property that is eligible for sale - i.e., assets that are neither exempt from or subject to a valid lien. Second, a trustee can unwind transactions a debtor engaged in shortly before filing for bankruptcy. For instance, a trustee may undo a property sale in which a debtor sold off the property at a suspiciously low price. This power is known as the trustee's "avoiding power" since it allows the trustee to undo deals where it looks like the debtor was trying to game the bankruptcy process.

Once a trustee has liquidated eligible property, the next step is to distribute the sale proceeds to the debtor's creditors. Trustees do so by paying creditors based on which class the creditor's claim falls within. Under the bankruptcy code, there are six classes, each of which must be paid in full before the trustee will begin paying claims from a lower class.

The trustee's role is just one thing among many that Illinoisans will need to know as they go through the bankruptcy process. To better understand that process, Illinois residents may benefit from speaking with an experienced bankruptcy attorney.

Source: uscourts.gov, "Chapter 7 - Bankruptcy Basics," Accessed Nov. 22, 2016

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