What Is the Process Through Which Trustees Pay the Creditors?

The chapter 7 trustee pays the creditors through a notification procedure. In a chapter 7, 98% of the time we’re able to protect all of our clients’ assets. When we file the petition, there is a box that we check if the debtor believes that there may be assets available to the creditors. Ninety-eight percent of the time we’re able to protect everything, so 98% of the time we check no: no funds available to the creditors. That information is included in that notice of case filing that goes out to all of the creditors at the beginning of the case, and so the creditors know that in a typical chapter 7, it’s very unlikely that they’re going to get anything. If later the chapter 7 trustee is able to determine that there are funds available to the creditors, either because there was a non-exempt asset or perhaps the trustee was able to get money back from a creditor because of a preferential payment, then the trustee will send a Notice of Assets aka Notice to File Claims to the creditors.

Then the creditors are given a period of time to submit claims to the court for their amount of debt. The creditors have 90 days to provide the claim to the court (180 days for governmental creditors). Once the claims are filed, the trustee files a Notice of Final Report and Proposed Distribution with the court that proposes how to liquidate the assets and to pay the claims. The trustee also gets a portion of the funds for his or her work and gets to deduct the costs and expenses.

As long as there are no objections to the trustee’s proposal within 21 days, then the trustee will execute the proposed distribution of funds and the money will be released to the creditors in a pro rata share in accordance with their claims. So the creditors who are owed the most money get the highest percentage of whatever is available to the bankruptcy estate.

Can The Trustee Take Funds That Were Obtained As Part Of A Personal Injury Claim Or A Tax Refund?

When conducting an asset analysis, we look at what is an asset as of the date the case will be filed. What legally is deemed an asset may be different from what a lot of people perceive as an asset. Most people think, “I don’t get my tax refund until maybe February, March, or April of the year when I submit my tax returns. So that refund is not an asset until I receive it.” However, your tax refund, for example, is “earned” throughout the year because the refund is comprised of the withholdings from your paycheck during that particular year. Even though you receive the tax refund sometime in the following year, after you file your tax returns, you “own” the asset (or at least a percentage of it) as of the date your file your case.

It’s probably best to illustrate this by way of an example. For example, if I’ve filed a chapter 7 bankruptcy on December 20th, 2016 and my tax refund is basically the amount of money I had withheld from my paycheck minus whatever my actual tax payment is, then I have “earned” about 99% of my 2016 tax refund because I’ve been paying my tax withholding since January 1 and now we’re about 95% of the way through the year. Even though I might not see that tax refund until March 30th of 2017, I have earned that asset as of December 20th, the day I filed the bankruptcy. So if you have a good bankruptcy lawyer who understands these laws, then the bankruptcy lawyer is going to list in your schedules 99% of estimated 2016 tax refund. We have to then set a value for the asset. Let’s use the number $2,000 for ease.

On schedule C, if this was applicable in your particular circumstance, using the wildcard exemption (11 U.S.C. § 522(d)(5)) for $2,000 to claim that amount exempt. What is likely going to happen at this time of the year is the trustee will require that after you complete your 2016 tax returns that you provide the trustee with the copy to verify that your estimate of the tax refund is accurate. The trustee wants to be sure you’re not going to get a $10,000 tax refund when you’re claiming the $2,000 tax refund. Another item to consider as an asset are settlements. So if you have a legal claim on the date your bankruptcy is filed, the right to that legal claim is considered an asset even if you haven’t met with an attorney or if you don’t know that you may bring that claim at some point in the future.

For example, if you’re in a car accident 3 months before your bankruptcy is filed and you were injured and you’re considering possibly bringing up a personal injury claim, that right to bring the claim is considered an asset that existed on the date your case is filed: even though you may never file a lawsuit, even though you may never meet with an attorney, even though it might turn out not to be a really strong claim. You have to list that asset and disclose it and provide an estimation of value. If you receive a settlement years down the road, whatever amount of that settlement that you’re unable to exempt from the bankruptcy estate would be due to the bankruptcy estate and the trustee would be able to take those funds and distribute into the creditors.

So one thing that we do for assets such as settlements where we know they exist but we really don’t know what the value is because if obviously they have a personal injury attorney, we try to get an estimation of value from the personal injury attorney as best they can provide and use that and exempt it as appropriate. Then if the value changes overtime, we have a duty to amend the value and the claim of exemption later on down the road. Those kinds of things can play out actually over a few years.

The discussion I have with my clients who have personal injury claims is if you think this is going to be particularly lucrative, it may make sense to put the bankruptcy on hold until you’ve gone farther down the lawsuit/settlement road to make sure that you’re not at risk of losing tens of thousands of dollars, if not more. Oftentimes it’s a minor fender-bender and if there is a claim, it’s probably going to be $10,000 or less and oftentimes they’ll say, “If we can exempt the $10,000 for bodily injury, then let’s go with that because that’s the best estimate a personal injury attorney can provide. I don’t think it’s going to go north of that, so let’s go ahead and file and in the event that the settlement goes north, we’ll have to amend but in all likelihood, it’s not going to be more than $10,000.”

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