When you file for Chapter 7 bankruptcy, the court appoints a bankruptcy trustee to oversee the case. If you have more property than you can keep under state exemption laws, the trustee will “liquidate” or sell the assets you can't protect and distribute the funds to creditors according to the priority order established by bankruptcy law.
Bankruptcy Trustee's Claim Responsibilities in Chapters 7 and 13
In a Chapter 7 case, the trustee is in charge of finding and selling assets for creditors. The trustee uses the funds to pay creditor claims. The role of the trustee is different in a Chapter 13 case. The filer pays through an approved three- to five-year repayment plan and the trustee distributes the funds to creditors, typically monthly.
How Does the Trustee Pay Creditor Claims in Bankruptcy?
Creditors submit “claims” for payment in bankruptcy. The trustee reviews the creditors claims and calculates administrative costs associated with the case before preparing the "Trustee's Final Report" showing the amounts proposed payment. After receiving court approval, the trustee pays priority claims in the following order:
- administrative expenses
- domestic support obligations, such as child support
- wage and benefit claims of employees for the 180 days before the bankruptcy filing
- security deposits owed to a tenant, up to a maximum amount set by statute
- particular pre-petition taxes and related penalties, and
- claims for death or personal injury you caused while operating a motor vehicle while under the influence.
After paying the priority claims, the trustee will pay general unsecured claims (all remaining debts) on a pro-rata basis. In Chapter 7, if funds remain after fully satisfying all claims, the trustee will return the balance to the filer. In Chapter 13, the trustee pays creditors according to the priority rules and the approved or “confirmed” Chapter 13 plan.
Find out about the different types of claims in bankruptcy.
What Is an Administrative Expense?
The highest priority creditor claim is an administrative expense, a necessary cost incurred after filing your case. Administrative expenses often include fees for accountants, attorneys, or real estate brokers, employee wages, and taxes. The trustee pays administrative expenses first, before any other creditors.
The expense must arise post-petition or after you file your case and be necessary for the preservation or administration of the estate to qualify as an administrative expense. It must also be reasonable. Here are examples of the most common types of administrative expenses.
Wages. If you own a business as a sole proprietor and file for bankruptcy, or if the company itself filed the bankruptcy case, any unpaid wages, salaries, or commissions that the enterprise incurs after the bankruptcy filing are allowable as an administrative expense. Wages are considered a cost of preserving the estate because, in most cases, if a debtor is running a business with employees, those employees are needed to keep the business
Taxes. Any unpaid taxes incurred after you file your bankruptcy petition are allowable as administrative expenses, including property taxes, income taxes, and employment taxes. Any fines or penalties relating to such taxes are also administrative expenses. As with wages, paying post-petition taxes is a cost of preserving the estate. If you don’t pay taxes, the government can place liens on your property or take other collection actions that could reduce the amount available to pay pre-petition creditors. Remember that this applies to property that will be sold for the benefit of creditors only—not property that you’re entitled to retain for yourself.
Other Creditors. A creditor can recover an administrative expense in some instances, too. For example, suppose a creditor recovers property you transferred or concealed. In that case, the creditor can recover the actual and necessary expenses incurred. To receive administrative creditor treatment, the creditor must show that the bankruptcy estate, and not just the creditor, benefited from the asset's recovery.
Trustee fees. In Chapter 7 and Chapter 13 bankruptcy cases, a trustee will be appointed to administer your case and pay your creditors’ claims. A bankruptcy trustee can collect a commission on the funds paid to creditors. The Chapter 7 trustee's commission, or trustee’s fee, is a statutorily set percentage of the amount the trustee pays creditors.
Compensation to Trustee's Professionals. In administering a Chapter 7 case, the trustee might need to hire an accountant, attorney, real estate broker, auctioneer, or other professional. For example, suppose the trustee decides to sell your home or other real property. In that case, the trustee must hire a real estate broker and an appraiser. Also, the trustee might need to file motions or lawsuits in the bankruptcy court to recover assets or to prosecute a lawsuit on behalf of the bankruptcy estate. For example, if you were a plaintiff in a personal injury case when you filed your bankruptcy, perhaps a lawsuit to recover damages arising from an automobile accident, the trustee could prosecute that lawsuit on behalf of the estate. Because the trustee will usually need to hire a lawyer, the fees and costs for those professionals are all entitled to administrative status.
Consult a Bankruptcy Lawyer
You'll want to speak with a bankruptcy attorney to find out which creditors the trustee will pay in your particular case. You can learn how to prepare for your appointment by reading Bankruptcy: Preparing to Meet with a Lawyer and how much you can expect to pay for a Chapter 7 or Chapter 13 case.