The Cast of Characters: The Players of the Bankruptcy Drama
Now that we know the basic framework of bankruptcy law, it’s time to meet the various parties involved in a bankruptcy case and understand their roles in the process.
Debtors and Creditors
Debtors and creditors are the stars of the bankruptcy show. The debtor is sometimes called the petitioner, since they file a bankruptcy petition to open the case. The debtor is the subject of the bankruptcy: the party that is either liquidating or restructuring their debts. The creditor is any party that has a claim for a debt or obligation from the debtor. The debtor may owe the creditor for a past due or current debt, or may be under an obligation pursuant to an agreement (installment contract, lease, or mortgage) to pay the creditor in the future.
Debtors and creditors can be individuals, corporations, LLCs, partnerships, or even municipalities. Creditors can also be any of these types of entities.
The Bankruptcy Trustee
Once the bankruptcy case is filed, all of the debtor’s assets become the “bankruptcy estate” (11 U.S.C. § 541). The estate has a trustee to manage its affairs and make sure the debtor is complying with the bankruptcy law. Each federal court district has a bankruptcy trustee, who is hired by the federal government. In most districts, the trustee has a team of attorneys that represent the trustee’s office and serve in court on the trustee’s behalf. In districts with large populations, the trustee’s primary role is as an administrator of the trustee’s office. The trustee herself will get personally involved only in major cases.
What does the trustee do? The trustee reviews the debtor’s petition and schedules (documents filed with the bankruptcy petition) to make sure they comply with the applicable bankruptcy chapter. The trustee will review the debtor’s finances to see if they are eligible to file bankruptcy, and if they have made a complete disclosure of all their assets, income, and debts. Most important, the trustee ascertains what assets the debtor has available to sell and pay off debts.
The trustee does this through review of the bankruptcy petition and schedules, and by holding a meeting called the 341 Meeting of Creditors (sometimes called the 341 hearing or 341 meeting). The trustee also has to determine whether the assets are encumbered, meaning a creditor already has a financial interest or lien in the particular asset, or whether the asset is “exempt.” Exempt assets are belongings that the debtor gets to keep after the bankruptcy case is over (11 U.S.C. § 522). They’re not subject to sale. Exempt assets are determined by state law.
In cases of suspected bankruptcy fraud, a special attorney from the United States Trustee’s Office (not the local district) may get involved. Bankruptcy fraud is a very serious crime, and the U.S. Trustee will investigate and prosecute anyone defrauding creditors or the trustee to the fullest extent of the law.
The trustee does not represent the debtor or creditors, although you may find a trustee friendly to one side or the other. They represent the U.S. government and are tasked with making sure the estate is administered according to the letter of the law.
The Bankruptcy Judge
This is someone you don’t see very often. The judge holds hearings and trials when the debtor, creditor, and trustee are unable to resolve matters themselves. The community of bankruptcy attorneys is a small one, and all of the players in a particular district tend to know each other and know how to resolve disputes. The judge only steps in when something goes wrong. To give you an idea of how rare that is, in the Northern District of Georgia, Rome Division (a rural area of North Georgia), there are typically 320 cases on the court’s hearing docket each week. No more than two or three require a hearing before the judge. I once met a bankruptcy attorney who, despite being in bankruptcy court every week, had not argued before a judge in 20 years!
When the judge is called upon to hear a case or motion, the judge does what all judges do: hear the evidence and legal arguments, and decide which evidence gets admitted and which does not, and ultimately renders a decision.