Role of Debtor and Standing Trustee Under Chapter 13 Bankruptcy

Key Background Articles:

Key Facts:

The debtor has a greater role under Chapter 13 than under Chapter 7, and, indeed, the debtor even has many of the powers of the trustee under Chapter 7 (§1303) . The main benefit of Chapter 13 and the main reason that most debtors choose it over Chapter 7 is that it allows the debtor to keep all of her property by paying out her income over a 3 or 5 year period to her creditors. Hence, a more active participation by the debtor is necessary.

Because there is no creditors' committee as there is in Chapter 11 and their role in the bankruptcy case is restricted to objections for cause, a standing trustee is appointed to supervise and investigate the debtor, and to receive payments from the debtor to pay to creditors.

When the Chapter 13 petitioner files, all of her property becomes part of the bankruptcy estate, but one in which she retains possession and control. After the confirmation of the payment plan to repay creditors, the property vests back to the debtor unless the plan or the court provides otherwise.

The debtor is free to use, sell, or lease property. If the debtor operates a business, then she may continue operating it as before, even obtaining new credit or loans to operate the business, but she must provide periodic reports and summaries of the operation of the business, including a statement of receipts and disbursements, to the trustee (§1304).

The debtor has the exclusive right to file a plan and to modify it before confirmation. The debtor also has an absolute right to dismiss the bankruptcy case. However, the debtor only has 15 days to file a plan if it was not submitted with the petition; the court, however, can extend the time for cause. Failure to file a plan on time can result in dismissal or conversion to another chapter.

The debtor must also complete a debt management course during the pendency of the bankruptcy; otherwise, she will not receive a discharge.

A fundamental difference between Chapter 7 and 13 is that postpetition earnings belong to the debtor under Chapter 7, but become part of the bankruptcy estate under Chapter 13, since this money is used to pay creditors. Furthermore, the Chapter 13 petitioner only receives a discharge after the completion of her payment plan 3 or 5 years after filing, or earlier, if the court approves a hardship discharge. Hence, the fresh start for the Chapter 13 petitioner begins long after filing, whereas the fresh start for the Chapter 7 petitioner begins immediately after filing, since he can retain all of his earnings after the bankruptcy filing date, so he does not even have to wait for his discharge to begin afresh.

While the Chapter 13 debtor has most of the rights and powers of the trustee under Chapter 7, courts have split as to whether the debtor also has the trustee's avoiding powers. The Bankruptcy Code does not specifically gives this power to the debtor under Chapter 13 (but does under Chapter 11), so some courts have decided that since it was not specifically listed, it was, therefore, the intent of Congress not to give this power to the debtor. However, many courts have interpreted the legislative history so that, although the debtor does not have the exclusive right to the avoidance powers as she does under §1303 and §1304, she does share the avoidance power with the trustee, and since the debtor would have a greater incentive to use the avoiding power, most courts have allowed it.

Chapter 13 Trustee

The Chapter 13 trustee has more limited duties under Chapter 13 than under Chapter 7—there is no liquidation of property. The Chapter 13 trustee mainly serves as a disbursing agent, who receives money from the debtor and pays the money to her creditors according to the confirmed plan. The trustee also makes sure that the debtor starts making payments, especially since the trustee is paid a commission, which is subtracted from the payments to creditors. The trustee may also provide guidance to the debtor so that the plan can be completed successfully.

However, the Chapter 13 trustee does share some duties with the Chapter 7 trustee. Most importantly, that the debtor has provided truthful information in the bankruptcy petition, and, in line with this objective, conducts the creditors' meeting where the debtor is interviewed under oath by the trustee and any creditors that choose to show up. Because the trustee serves the interests of creditors, the trustee has standing to object to the confirmation or the modification of a plan, and to the valuation of property that the debtor wants to cram down or to strip liens. The trustee is also required to make sure that the debtor pays all domestic support obligations, which Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) has elevated to the highest priority. No plan can be confirmed unless all domestic support obligations have been paid in full and where the plan provides full payment in the future.

One of the main duties of the debtor is to make monthly payments to the trustee so that the payments can be disbursed to her creditors. The debtor can also make some payments for secured property, such as a mortgage, directly to the creditor. The debtor must make the 1st payment within 30 days of filing the bankruptcy petition. The trustee will keep the payments until a plan is confirmed. If a plan is not confirmed before the close of the case, the trustee will return the money.

Because the duties of the Chapter 13 trustee are more limited, a single standing trustee will often serve an entire judicial district. This also facilitates payments, since many Chapter 13 debtors are usually paying the same large creditors, particularly banks holding mortgages or large credit card issuers. The standing trustee operates under the supervision of the U.S. Trustee for that district, who operates under the direction of the United States Attorney General.

The trustee is compensated by taking a percentage of the payments collected from the debtor, which, for Chapter 13 cases, is typically 10%.