Should Consumer and Commercial Trustees be Distinct in Chapter 7 Cases?

Bankruptcy trustees oversee consumer and commercial bankruptcy cases, but trustees perform different roles depending upon the type of bankruptcy filing. In reorganization bankruptcies, as a recent article in The Yale Law Journal notes, there are specific trustees that handle Chapter 13 consumer bankruptcy cases, while businesses filing for Chapter 11 typically perform the role of trustee themselves as a debtor-in-possession. In other words, trustees are different and distinct when it comes to consumer and commercial reorganization bankruptcy cases. Yet as the article points out, the same distinction does not exist in Chapter 7 bankruptcy cases, and consumers who are filing for a liquidation bankruptcy ultimately could suffer the consequences.

Argument for Distinction Between Consumer and Business Trustees in Chapter 7 Bankruptcy Cases

What is the argument for a clearer distinction between consumer and business trustees in Chapter 7 bankruptcy cases? The article in The Yale Law Journal emphasizes that “one size fits none,” and the fact that the same trustees handle both consumer and commercial Chapter 7 cases benefits neither the consumers or businesses involved in those cases. To make their point, the authors of the article make several key points, including the following:
  • Consumers involved in Chapter 7 cases “have rights that artificial entities do not”;
  • Trustees involved in Chapter 7 cases “create different socioeconomic value for consumers and businesses”;
  • Work that trustees do on a day-to-day basis “differs significantly across case types”; and
  • Trustees in consumer Chapter 7 cases “receive far less judicial oversight” than trustees in commercial Chapter 7 cases.
American bankruptcy law should account for these key distinctions, the article argues, and institute appropriate policy changes. Most immediately, the authors of the article suggest that Chapter 7 trustees should be compensated differently based on whether they are attached to a consumer or a commercial case, and that trustees in Chapter 7 cases should specialize in either consumer or commercial bankruptcies.

Potential Problems With Current Chapter 7 Trustee System

How do the issues outlined above result in potential problems in Chapter 7 bankruptcy cases? First, the authors of the article point out that a Chapter 7 trustee’s compensation is based on the amount of assets being administered. Since Chapter 7 business bankruptcy cases tend to involve significantly more assets being liquidated than in consumer cases, trustees tend to earn significantly more money administering Chapter 7 commercial cases. The article cites data showing that, on average, more than $986,000 is liquidated in commercial liquidation bankruptcies, while the average amount of assets liquidated in consumer Chapter 7 cases is just over $159,000.

As a result, trustees may prefer to avoid consumer cases and ultimately could handle consumer cases in ways that are not necessarily fair to consumers. The article suggests that, in consumer Chapter 7 bankruptcy cases, “trustees may overzealously investigate every consumer case they get to make those cases worth their while, subjecting those debtors to excessive takings.”

Seek Advice from an Oak Park Bankruptcy Attorney

If you have questions about how your Chapter 7 case will work or any concerns about the role of the trustee, one of our Oak Park bankruptcy attorneys can assist you. Do not hesitate to get in touch to find out more about our services. Contact the Emerson Law Firm today.


See Related Blog Posts:

What are My Options if I am Unable to Make My Chapter 13 Payments?

What is a Bankruptcy Trustee?

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