By James J. Devine
The Department of Justice (DOJ) notified the Administrative Office of the U.S. Courts that no funds are available to transfer to the Judiciary for additional payments to eligible Chapter 7 bankruptcy trustees for fiscal year 2023.
Despite this shortfall, trustees are encouraged to file payment eligibility certifications for fiscal year 2024.
The Bankruptcy Administration Improvement Act of 2020 (BAIA) introduced additional payments for eligible Chapter 7 trustees for fiscal years 2021 through 2026. These payments rely on excess collections in the DOJ’s U.S. Trustee System Fund. In fiscal year 2021, eligible Chapter 7 trustees received an additional $60 per applicable case.
However, due to insufficient funds, no additional payments were made for fiscal years 2022 and 2023.
The amount available for Chapter 7 trustee payments is determined each year based on the balance in the U.S. Trustee System Fund and the number of new Chapter 7 filings and cases converted to Chapter 7 during the fiscal year.
The United States Trustees appoint and oversee private trustees who manage bankruptcy estates according to chapters 7, 11, 12, and 13 of the Bankruptcy Code. While these private trustees are not government employees, they collaborate with the United States Trustee to maintain the efficiency and integrity of the bankruptcy system.
Chapter 7 trustees, commonly known as “panel trustees,” are appointed by the United States Trustee to a panel within each judicial district. After their appointment, Chapter 7 cases are typically assigned to them through a blind rotation. These trustees are responsible for gathering the debtor’s non-exempt assets, liquidating them, and then distributing the proceeds among the creditors as per the Bankruptcy Code.
The Bankruptcy Administration Improvement Act of 2020 established an additional payment for eligible Chapter 7 trustees for fiscal years 2021 to 2026.
Among other objectives, the legislation is aimed at ensuring “adequate funding” of U.S. trustees for “anticipated increases in business and consumer caseloads” by providing “long-overdue additional compensation for chapter 7 case trustees whose caseloads include chapter 11 reorganization cases that were converted to chapter 7 liquidation cases.”
The statute provides that eligible Chapter 7 trustees would receive an additional payment of $60 for each applicable case beginning in fiscal year 2021. The payments are funded by excess collections in the DOJ’s U.S. Trustee System Fund.
As explained by the U.S. judiciary, amounts available for payment to Chapter 7 trustees are determined annually based on the available balance in the Trustee System Fund, and by the case count of new Chapter 7 filings and cases converted to Chapter 7 during a fiscal year.
Like 2023, the DOJ reported insufficient funds in the Trustee System Fund for any additional payments in fiscal year 2022.
Chapter 11 bankruptcy proceedings involve two types of trustees: “subchapter V trustees,” appointed under the Small Business Reorganization Act of 2019, and the standard “chapter 11 trustees” for non-SBRA cases. For SBRA cases, subchapter V trustees are selected from national pools on an individual case basis whenever a debtor chooses to file under subchapter V of chapter 11 in the Bankruptcy Code.
Trustees in these cases are not assigned to manage the debtor’s businesses unless the court specifically orders it. Their main objective is to aid in the approval of a mutually agreed-upon reorganization plan.
In non-SBRA cases, chapter 11 trustees are selected individually based on a motion from an interested party or the United States Trustee and must be approved by the court, either for cause or because it serves the best interest of creditors, equity security holders, or the estate. If required or suitable, the chapter 11 trustee will manage the debtor’s business and perform additional trustee responsibilities.
Chapter 12 and Chapter 13 trustees are known as “standing trustees” because they are statutorily appointed by the United States Trustee to oversee Chapter 12 and Chapter 13 cases within a designated geographic region.
These trustees assess the debtor’s financial situation, advise the court on the approval of the debtor’s repayment plan, and manage the execution of the court-sanctioned plan by gathering payments from the debtor and distributing them to creditors. In some jurisdictions, Chapter 12 trustees may operate on an individual case basis instead of as standing trustees.