The bankruptcy process begins with a petition filed in bankruptcy court that triggers an automatic stay which prohibits further collection efforts of creditors.
The role of the bankruptcy trustee
The National Association of Bankruptcy Trustees describes the Trustee role as follows:
Trustees review the debtor’s petition and schedules after they have been filed with the Court. At times they may request additional information from the debtor to review in conjunction with the debtor’s petition and schedules. They are careful to review the debtor’s exemption schedules to determine whether the debtor has properly followed the state or federal exemption laws.
The Panel Trustee serves as the hearing officer for the 341 hearing. Each debtor is sworn and examined by the Panel Trustee and the creditors are allowed the opportunity to ask questions which is moderated by the Panel Trustee. After the Section 341 hearing, the Panel Trustee will object to exemptions that have been improperly claimed.
The Panel Trustee will seek turnover of assets held by the debtor or other parties and will arrange for their eventual sale. The Panel Trustee may also seek to recover assets conveyed by the debtor prior to the filing of the bankruptcy. The Panel Trustee will cause a notice to be given to all creditors to file their claims with the Bankruptcy Court. The Panel Trustee will then pay creditors according to the priority level they have been given by the Trustee. After all funds held by the Panel Trustee are distributed, the Trustee will seek approval of the Court to close the bankruptcy case.
Sifting through exempt and non-exempt assets
While the court appoints a trustee to liquidate assets to pay existing creditors, most assets are subject to existing liens or are exempt from liquidation. Generally, things like household goods, clothing and personal items are fully exempt. Property which is particularly valuable, such as oil paintings, coin collections, or rare items may have higher value than what can be protected under the exemption rules. In those circumstances, the debtor could be required to turn over the property to the trustee or offer to buy the trustee out of his interest in the non-exempt property.
Once the trustee collects any nonexempt assets and pays creditors from their proceeds, any remaining debt is discharged, subject to certain limitations such as secured debt, taxes, student loans, alimony and fraudulent acts.
If the debtor is concerned about losing certain assets in a Chapter 7 bankruptcy, he or she may be able to reaffirm certain assets, which permits them to keep the property outside of the bankruptcy by entering into a reaffirmation agreement if the debtor has sufficient disposable income and is relatively current on payments and the creditor agrees to reaffirm.
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