Chapter V: Systems Issues

• Jurisdiction: United States

V: Systems Issues

§ 5.01 Chapter 7 Trustee Compensation

(a) Compensation should be increased for trustees to $120, with the increase in the fee coming from bankruptcy filing and other court fees already paid to the general treasury. These bankruptcy filing and other court fees should be placed into a special fund earmarked for trustee compensation.

(b) The “breakpoints” for trustee compensation in asset cases should be changed to allow for more trustee compensation. The first two breakpoints should be increased from 25% of the first $5,000 and 10% of the next $45,000, to 25% of the first $10,000, and 10% of the next $90,000. The 3% per million dollars in excess of $1 million should be increased to 4% per million. The 5% applicable on distributions between $100,000 and $1 million would not change.

Background. Chapter 7 trustees are an integral part of the consumer bankruptcy system. Section 704 lists the formal duties of a chapter 7 trustee with respect to a bankruptcy case. In addition, chapter 7 trustees have duties to provide information as part of the oversight function of the U.S. Trustee Program (USTP) (or by the bankruptcy administrator) given the level of the trustee’s fiduciary duties and the need for trustees to provide a proper accounting and expeditious administration of estates.⁶⁴⁷ In all cases, chapter 7 trustees must:

review the petition, statements, schedules, and tax returns;

conduct the section 341 meeting;

investigate the debtor’s financial affairs;

submit reports to the court and the U.S. Trustee;

investigate and refer cases of abuse, criminal misconduct, and discharge issues;

review bank statements and other records as needed;

send letters notifying claimants of domestic support obligations and relevant state child support enforcement agencies of the bankruptcy filing and of the later discharge; and

respond to public inquiries (e.g., creditors, debtor’s counsel, pro se debtors).

In asset cases, chapter 7 trustees have additional responsibilities:

review claims;

account for all property received;

review bank statements, insurance, tax, stock, and business records;

perform the obligations of an ERISA plan administrator if necessary;

maintain the records and transfer patients of a health-care business; and

monitor and manage all professionals employed.

Chapter 7 trustees also must undergo audits of their business records with follow-up inquiries from the auditors.

As compensation, a chapter 7 trustee earns a base fee of $60 per case plus a percentage of the estate assets that the trustee distributes to creditors.⁶⁴⁸ In cases without assets that can be administered for payment to creditors — “no-asset” cases — the $60 base fee is the only compensation that the trustee receives. And because this compensation comes from the filing fee, a chapter 7 trustee earns no compensation when the court waives the filing fee for debtors who are granted a filing fee waiver.⁶⁴⁹ According to the Commission’s calculations from the Federal Judicial Center’s (FJC) Integrated Database,⁶⁵⁰ the courts waived the filing fee in 4.7% of consumer chapter 7 cases in the 2016 calendar year, which was the most recent complete year for which data were available. As Figure 1 shows, the current waiver rate is more than double what it was in 2007.

Figure 1: IFP Waivers in Consumer Chapter 7 Cases by Year

The current base fee has departed from historical norms. When the Bankruptcy Code was first enacted, the trustee received $20 out of a $60 filing fee.⁶⁵¹ Congress raised the base fee in 1984 to $45 and raised it again in 1994 to $60. The base fee has not changed since 1994 and remains $60. If the base fee had kept pace with inflation, it would be approximately $101 as of the end of 2018. The chapter 7 filing fee has increased several times since 1994, either through congressional action or through increases in the miscellaneous fees implemented by the judiciary. Table 1 shows the relationship between the base fee in a no-asset case and the overall chapter 7 filing fee at selected points in time.

Table 1652: Relationship Between Chapter 7 Trustee Base Fee and Chapter 7 Filing Fee, Selected Years
Filing Fee	Base Trustee Fee	Base Fee as %; of Filing Fee
1979	$60	$20	33.0%
1986	$90	$45	50.0%
1994	$145	$60	41.4%
2003	$209	$60	28.7%
2005	$274	$60	21.9%
2006	$299	$60	20.1%
2018	$335	$60	17.9%

As the table shows, the base fee as a percentage of the filing fee is at a historical low. The filing fee has been raised to recoup the costs of administering the bankruptcy system, but trustee compensation has not kept pace.

To understand the total way that trustees are compensated, one must also consider the additional compensation awarded to trustees in asset cases. In an asset case, sections 330(a)(7) and 326(a) provide that chapter 7 trustees receive a commission on a sliding scale based on a percentage of the money disbursed to creditors:

25% of the first $5,000;

10% on amounts from $5,001 to $50,000;

5% on amounts from $50,001 to $1,000,000; and

3% on amounts more than $1,000,000.

In theory, the percentage of compensation chapter 7 trustees earn in asset cases combines with the $60 base fee to provide “overall, reasonable compensation” for the trustee’s services.⁶⁵³ Using federal court and USTP data, ABI consultant Ed Flynn provided an analysis to the Commission that calculated that only 8.5% of the chapter 7 cases from 2007-2016 were asset cases. The USTP’s database of chapter 7 trustee final reports reveals that over half of asset cases fall into the “small-case category,” with distributions of $5,000 or less.⁶⁵⁴ The ABI’s Consumer Bankruptcy Fee Study concluded that “the system has failed chapter 7 panel trustees.”⁶⁵⁵

Recommendation. In written comments and in statements made to the Commission and its committees, the need to raise trustee compensation appears to enjoy almost unanimous support. The Commission agrees. Inadequate compensation affects not just the chapter 7 trustees but also the consumer bankruptcy system more broadly, with skilled chapter 7 trustees leaving for more lucrative opportunities and those who remain facing skewed incentives to find assets and sometimes taking unduly aggressive legal positions for that purpose.

The Commission recommends that Congress should raise the chapter 7 trustee base fee to $120. This would be 36% of the current filing fee, much closer to the historical norm and responsive to the increase in trustee duties implemented by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.⁶⁵⁶

The Commission also addressed the more difficult question of the appropriate source for the fee increase. A consensus emerged that the bankruptcy system already has enough funds to support the increase in chapter 7 trustee compensation without increasing filing fees. The Commission therefore recommends that the increase in the fee should come from bankruptcy filing and other court fees already paid to the general treasury. These bankruptcy filing and other court fees should be placed into a special fund earmarked for chapter 7 trustee compensation.

A comprehensive approach to raising trustee compensation also should consider the fees that trustees earn in asset cases. The Commission recommends changing the breakpoints for trustee compensation in asset cases as summarized in Table 2. The last column of Table 2 estimates the total increase in chapter 7 trustee compensation from the changes, using an analysis that ABI consultant Ed Flynn provided to the Commission based on annual averages from asset cases closed during 2015 and 2016 (but not including the 3% of chapter 7 cases that come from the bankruptcy administrator districts in Alabama and North Carolina).

Table 2: Comparison of Current Trustee Fees in Asset Cases and Commission Recommendations
Current Law	Commission Recommendation	Estimated Increase in Trustee Compensation
25% for $1 to $5,000	25% for $1 to $10,000	$12.2 million
10% for $5,001 to $50,000	10% for $10,000 to $100,000	$9.8 million
5% for $50,0001 to $1,000,000	5% for $100,001 to $1,000,000	n/a
3% for > $1,000,0000	4% for > $1,000,000	$14.1 million
Total:	$36.1 million

The analysis assumes any increase in the fee breakpoints would be applied to pending cases for it to have the immediate effect in trustee compensation shown in the last column. The Commission took no position on whether the recommendation should apply to pending cases and provides the analysis only to give a sense of how trustee compensation would change if the recommendation was fully implemented.

§ 5.02 Chapter 7 Trustee Employment of Professionals

The Federal Rules of Bankruptcy Procedure should require “notice and a hearing” on the trustee’s application to employ any professional. Notice should be given to all creditors, the U.S. Trustee, and the debtor.

Background. Section 327(a) authorizes a bankruptcy trustee to employ professional persons, including attorneys and accountants. If it is in the best interest of the estate, the trustee can act as the attorney or accountant for the bankruptcy estate.⁶⁵⁷ Federal Rule of Bankruptcy Procedure 2014 implements these provisions by requiring the filing of an application to employ a professional and transmission of that application to the U.S. Trustee. The rule requires the application to state the reasons for selecting the professional, the services to be rendered, and the compensation arrangement. It also mandates a verified statement of the professional connections to any parties in the case, including the U.S. Trustee.

The Commission received and discussed comments about possible conflicts of interest when the trustee or a member of a trustee’s firm acts as a professional in the case. Other comments asserted that such conflicts were uncommon or observed that trustees generally employ their own firm...