Bankruptcy is the status of a debtor who has been pronounced unable to pay or meet their debt obligations by a judicial process. It happens when a loan goes into default, and the borrower is not in a position to repay its obligations. Consequently, if the borrower is an entity, either the borrower or the lender may put the company into bankruptcy, which is a court-supervised liquidation or reorganization of the borrower's assets in favor of its lenders or creditors. The primary aim of this process is to exploit the chances of the lenders getting repaid. The company's liabilities are restructured during reorganization to meet its financial obligations moving forward.
During a bankruptcy process, a trustee is appointed, whose primary duty is to wade in and oversee the liquidation of the debtor's assets to repay their creditors or help reorganize their debts, obligations, and assets. Although it takes time, the bankruptcy process can help resolve a debt crisis and enable the debtor to start over financially. This article provides an overview of bankruptcy trustees and examples of trustees.
What is a Bankruptcy Trustee?
A bankruptcy trustee is an administrator appointed by the court to manage a debtor's estate in a bankruptcy proceeding. Under bankruptcy law, a debtor's bankruptcy estate is created during bankruptcy filing and contains the debtor's property, including chattels, stocks, and debts. It is considered a distinct legal entity from the debtor.
Role of Bankruptcy Trustee
A bankruptcy trustee can do many things, but their role largely depends on the type of bankruptcy declared and the circumstances of a specific debtor and their lenders/creditors. However, regardless of the situation or case, a bankruptcy debtor has certain key duties, and they include the following:
- Reviewing Bankruptcy Petitions - This involves checking information about income, property, debts, and financial affairs disclosed in the bankruptcy paperwork and comparing it to other financial documents, including the bankruptcy record.
- Managing the Debtor's Asset - This involves realizing and distributing the bankruptcy estate, including disposing of assets at the highest feasible price to repay creditors and taking over all dealings with the creditor. However, in the process, the bankruptcy trustee will ensure enough assets are left in the bankruptcy estate to enable the business to continue its normal operations.
- Ensuring Compliance with Bankruptcy Laws - A bankruptcy trustee must adhere to all bankruptcy laws and work closely with the court's approval.
Types of Bankruptcy Trustees
Bankruptcy trustees are assigned to bankruptcy cases by the United States Trustees. The three main types are discussed below.
Chapter 7 Trustee
A Chapter 7 trustee's roles include finding, identifying, and selling the debtor's assets for the benefit of the creditors. Typically, they review all the property (exempt and non-exempt assets) documented in the bankruptcy paperwork. By law, the debtor can keep the exempt assets, but the non-exempt assets will be sold, and the sales proceeds will be distributed to creditors. Other duties of Chapter 7 trustees include checking the debtor's identification and interviewing them, reviewing the creditors' proof of claim forms, and investigating undisclosed assets.
Chapter 13 Trustee
Chapter 13 bankruptcy helps a debtor to reorganize their debts so they are more manageable instead of outright selling their property to repay obligations. A Chapter 13 trustee is responsible for reviewing the paperwork, including the bankruptcy petition and the reorganization plan, after which it will determine whether the debtor meets certain bankruptcy criteria. The trustee is also required to conduct a meeting of creditors, with the debtor in attendance. During the meeting, the debtor may be questioned about their debts, assets, expenses, incomes, and their reorganization plan. Furthermore, a Chapter 13 trustee represents a debtor's case in court, collects payments from the debtor, reviews court reports, and pays the creditors as stipulated in the repayment plan.
Chapter 11 Trustee
Chapter 11 bankruptcy is a type of reorganization bankruptcy that allows a debtor and its creditors to negotiate new repayment terms affordable by the debtor. It does not stop a business from operating while they repay creditors over a period of time. Hence, a Chapter 11 bankruptcy trustee's primary duty is to reorganize a debtor's business debts, assets, and obligations to help the business emerge from bankruptcy and continue its operations. In certain cases, the trustee may coordinate selling some assets or scaling down the debtor's operations to reduce expenses.
Duties and Powers of a Bankruptcy Trustee
The major purpose of appointing trustees in bankruptcy cases is to find, realize, and distribute all available assets in bankruptcy estates in adherence with the law. They can exercise their judgment while managing the bankrupt's estate. The powers of a bankruptcy trustee and other duties are discussed below.
Administrative Duties
A bankruptcy trustee monitors the conduct of the parties involved in a bankruptcy case and oversees various administrative functions. These include case administration and the distribution of the proceeds from assets sale to creditors.
Investigative Duties
In a bankruptcy case, a trustee can investigate the circumstances surrounding the transactions between the debtor and creditors before the bankruptcy. The primary purpose of their investigations is to evaluate the evidence presented by the creditors and identify potential abuse or fraud. This will help a bankruptcy trustee determine whether any dealings can be challenged, set aside, or modified to the creditor's advantage.
Legal Duties
The legal duties of a bankruptcy trustee include filing all the required forms and documents with the court and defending or bringing legal proceedings about any claim by or against the bankrupt. They also have the power to apply to the court to sell or otherwise deal with the bankrupt's property or assets in a bid to repay their creditor. If necessary, a bankruptcy trustee may apply to the court for the possession and sale of the debtor's home.
Support Duties
Although a debtor does not exactly represent or advocate for the debtor in a bankruptcy case, they provide certain support roles, especially as an independent third party between the debtor and the bankruptcy court. They also monitor debtor plan compliance and ensure the bankrupt's compliance with court orders.
Example of a Bankruptcy Trustee in Action
Rite Aid
Rite Aid is a company that provides pharmacy-related solutions with fully integrated specialty pharmacy and mail-order services. Its first store opened in Pennsylvania in 1962 and has since expanded its frontiers across the United States through several acquisitions. However, following several months of problems for the drugstore industry, the company, in October 2023, filed for Chapter 11 bankruptcy. The company had earlier filed a notice to the United States Securities and Exchange Commission informing them it would not be able to file its latest quarterly financial report as it was seeking strategic alternatives. This implied Rite Aid was considering filing for bankruptcy, which it did in New Jersey.
Rite Aid had lost about $1 billion within three quarters, between March 2022 and March 2023, and an additional $307 million between March and April 2023. Between 2018 and 2023, the company had lost nearly $3 billion. It was in terrible financial shape, and at the beginning of June 2023, Rite Aid only had $135.5 million of cash on hand. Its long-term debt of about $3.3 billion had already exceeded the value of the company's assets by almost $1 billion. This debt became difficult to finance with increasing interest rates. Rite Aid's largest creditors include the Insurer Humana Health and a pharmaceutical company, McKesson Corporation.
The company was able to raise $3.45 billion to fund its business operations while still in bankruptcy. During this period, it plans to continue serving its numerous customers through its chain of stores. As part of the bankruptcy plan, the company is accelerating its pace of store closures. In addition, it plans to sell off a few of its businesses to be able to repay its creditors and resolve its other legal disputes.
Challenges Faced by Bankruptcy Trustees
Being a bankruptcy trustee comes with a lot of responsibilities and challenges. The following discusses some of these challenges and how to overcome them:
- Managing Complex Asset Portfolios - They are expected to assess the value of diverse assets, including inventory, real estate, and intellectual property. To resolve this challenge, they must leverage their legal expertise.
- Managing Conflicts of Interest - Sometimes, a trustee's personal interest may be at variance with their fiduciary roles. However, this challenge can be resolved if the bankruptcy trustee acts in the best interest of all parties and makes impartial decisions.
- Navigating the Legal Complexity of Bankruptcy Proceedings - Bankruptcy cases come with lots of legal complexities, including intricate negotiations with creditors. Trustees must be able to interpret several bankruptcy codes, statutes, rules, and court decisions accurately to solve this challenge.
- Dealing with the Trust Document - Understanding the intricacies of a trust document and dealing with incomplete or inaccurate information are a great deal of problems for bankruptcy trustees. Trustees must understand their responsibilities and obligations and be able to review trust documents carefully to overcome this challenge. They may also seek legal advice where necessary.
- Regulatory and Legal Compliance - There is a complex web of regulatory and legal requirements a trustee in a bankruptcy case must navigate. However, staying updated on changes in tax and trust laws and seeking legal advice when necessary can help them overcome this complexity.
For the Debtor
A bankruptcy trustee helps the debtor by ensuring a fair and honest process by maximizing the amount the debtor is paying their creditors. They also provide support roles, such as making sure that payments are made according to the repayment plan. In addition, they help protect the bankruptcy estate and ensure it is not depleted before all the debtor’s creditors have been paid.
For the Creditors
A bankruptcy beneficiary ensures equitable distribution of assets and payment to a debtor's creditors where there are more than multiple creditors. Typically, creditors have an absolute interest in protecting the bankruptcy estate. So, the trustee will help them ensure maximum potential recovery from the estate.
For the Legal System
The importance of the bankruptcy trustees in the legal system cannot be overstated. They help to ensure all party's compliance with bankruptcy laws and uphold the integrity of the bankruptcy process.
Make sure to seek professional advice if considering bankruptcy. Typically, when a person or entity goes bankrupt and files for bankruptcy, the U.S. Trustee Program will assign a bankruptcy trustee who will oversee the bankruptcy proceedings. While a trustee is an independent contractor, it is mandatory that they answer to the court and must comply with all bankruptcy laws. They are one of the most important elements in any bankruptcy case. Hence, it is vital that you understand the role of the bankruptcy trustee and their impact on your case.
