21 May Why Replace Chapter 7 Bankruptcy Trustees Now?
When someone leaves a job, is it always necessary to replace them? The bankruptcy system’s watchdog seems to think so, even if that makes little sense.
Chapter 7 Trustees are assigned randomly to bankruptcy cases to identify and liquidate property not protected from the creditors. They are paid $60 per case and nothing else unless they can pay something on those debts. So they’re like commissioned salespeople, being paid a base amount per account and no more unless they can close a deal.
And deals are thinner these days. Bankruptcy filings are down dramatically in the last three years, since the economic recovery began. They are down over 25% in that time. And business cases with potentially-large assets — and large commissions — are on the endangered species list.
The reality in Chapter 7 is that the vast majority of cases pay the trustee only $60. There’s nothing to sell.
So what happens when a trustee retires or passes away? The cases that would go to her are available to be assigned to the remaining trustees. If business is “off” by over 25% in 3-4 years, do you need as many salesmen to do the job? No, of course not. And if you replace them, you’re making it harder for all trustees to earn enough to survive.
Despite this basic logic, the U.S. Trustee — the Department of Justice agency that oversees and appoints trustees — seems to be inclined (at least in Missouri) to continue replacing trustees as they drop out.
It does take time to add trustees. If filings “spike,” the other trustees can be swamped with work while new ones are found, qualified, and trained. But this happened in 2005 with the flood of new cases triggered by the law change. Trustees managed to cope. And normally volume doesn’t go up more than 10-15% in any year — an increase most trustees would happily take on for years before complaining they need more help.
Obviously one result could be a brain drain. Older, more experienced trustees who have other options may walk away. Like any corporation that doesn’t want to explicitly force out older salesmen, perhaps the UST is trying to clean house.
Consumer advocates should be concerned. Keeping a full roster inevitably makes trustees “hungrier.” A trustee can’t make more cases get filed nor assure that he gets a larger share of the cases that are filed. So the only way to “goose” his compensation is by “finding” assets.
Of course that’s their job. But a trustee is expected to pursue the liquidation of property only where it makes economic sense and will yield a “meaningful” amount to creditors. If in the past it didn’t make sense to chase $2,000 in assets — because you might earn only $500 of that for all the paperwork and time while paying $1,500 or less to creditors — what is your threshold if 25-30% of your income has disappeared? Suddenly maybe a $1,000 asset is worth chasing, even if you only make $250 yourself. Maybe less if you get desperate.
Does that really benefit creditors? Not really because it’s spread pro-rata over all the creditors, so often only a few dollars each at best. But at least it’s part of the job and reasonable people can disagree on what is a meaningful amount.
But if your income keeps dropping then you do have one other alternative, albeit a less-savory one: You can start squeezing the debtors and creditors for money. You can challenge exemptions that have stood for years. Try to sell or “rent” assets that traditionally could not be sold. You can threaten to fight a discharge if the debtor doesn’t pay to “settle” some innocent failure in their paperwork. You can demand return of property from 3rd parties where there is little basis for recovery — but a high expense in fighting back. And so on.
Anyone familiar with the bankruptcy system can think of a dozen different ways in which a trustee could leverage their position to keep up an income. Since many trustees reduce or stop earning money in other work to avoid conflicts with their trustee duties, the temptation will get stronger to “squeeze” the other parties to a case to pay the bills.
Perhaps the UST just doesn’t like consumer debtors. Encouraging aggressive, even predatory, behavior by trustees could discourage bankruptcy filings. In theory a judge ultimately has the power to curb that behavior, although in practice the cost of litigating “small change” issues with a trustee is a losing proposition for the consumer or other party.
As the only official face for the bankruptcy system that most debtors ever see, the financial pressures that are being brought to bear on them to find assets (however marginal or questionable) must be concerning.
Photo credit: Jay
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