When you file for bankruptcy, you can expect the bankruptcy trustee to ask you questions about anything in your bankruptcy paperwork that suggests money might be available for creditors or that you're hiding assets. The bankruptcy trustee is responsible for overseeing your case, including reviewing your paperwork before conducting the 341 meeting of creditors—the hearing all filers must attend. This article discusses the common red flags the trustee will ask about at the creditors meeting.
In both Chapter 7 and Chapter 13 bankruptcy, the value of property matters—primarily because of the rule that entitles unsecured creditors to an amount equal to your nonexempt property. Nonexempt property consists of assets you can't protect with a bankruptcy exemption. Here is how this works.
A Chapter 7 trustee sells nonexempt property to pay unsecured creditors. By contrast, the Chapter 13 trustee doesn't sell property. Filers can keep everything they own—but that doesn't mean they get a free ride. A filer must pay unsecured creditors at least as much as they'd receive in Chapter 7 through the repayment plan. This rule is known as the "best interest of creditors test."
Not only are the creditors' rights at stake but the trustee gets paid according to the amount dispersed to creditors. The more assets, the more the trustee benefits financially. So, you can expect the trustee to look into your property holdings thoroughly and ask about any red flags.
For instance, the trustee might disagree with the value you've placed on an item or suspect that you sold an asset for less than it was worth and ask about it. Or—and this does happen—an ex-spouse or ex-business partner might claim that you're hiding valuable property. Expect the trustee to follow that tip.
The trustee will also review your income calculations to ensure you're qualified for Chapter 7 bankruptcy or are paying all your disposable income into your Chapter 13 repayment plan. The trustee will compare your bankruptcy petition disclosures to the supporting documents you must turn over, such as paycheck stubs and tax returns. If your income doesn't match your reported figures, or if you inaccurately report side business profits, you can expect some pointed questions.
The trustee will also examine the expenses disclosed on Schedule J and the bankruptcy means test. The trustee is checking for reasonability. A trustee who thinks your expenses are too high will object to your Chapter 7 bankruptcy or argue that you can afford to pay more in Chapter 13 bankruptcy.
A trustee can "avoid" or cancel preferential payments made to creditors shortly before bankruptcy. A preferential payment will arise when a debtor pays back a debt to an "insider," such as a relative or someone with whom the debtor has close business dealings, within the year before the filing.
Other preferred creditor payments can occur within 90 days before filing when the payment amount exceeds the current threshold. Check the Statement of Financial Affairs for Individuals Filing for Bankruptcy form for current amounts.
A trustee who determines that you made a preferential payment can get that money back for the benefit of all your creditors. In practice, you might choose to pay the money back yourself if you don't want the trustee to pursue your relative for loan payments.
Any recent property transfer can raise a red flag and prompt further questioning. For instance, if you give away or transfer property within two years of bankruptcy, you must disclose it on your statement of financial affairs form. Depending on the specifics of the transfer and whether you intended to defraud your creditors, the bankruptcy trustee might:
Defrauding creditors in this manner involves taking steps to pay them less than what they're owed. For more information, see Bankruptcy Clawbacks: Preferential & Fraudulent Transfers.