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How Are Kentucky Bankruptcy Trustees Paid, and How Does That Affect My Bankruptcy?

Posted on Thursday, February 22nd, 2018 at 2:38 pm    

Bankruptcy Trustees come in several flavors. The Covington Division of Kentucky’s federal bankruptcy courts alone have three Chapter 7 bankruptcy trustees, one Chapter 13 bankruptcy trustee, a United States Trustee, and occasional special trustees that might be appointed to oversee especially complex cases or cases in which other trustees might have a conflict of interest. Covington’s bankruptcy court covers all of Northern Kentucky*, but does not cover Cincinnati, Ohio, or the counties around Lexington or Louisville. There are a lot of bankruptcy trustees out there!

For this article’s purposes, we are concerned only with the Chapter 7 and Chapter 13 bankruptcy trustees in the Covington Division. Knowing how these trustees are paid, and how they are incentivized, can greatly affect whether you decide to file a Chapter 7 or a Chapter 13 bankruptcy.

Chapter 7 Trustees Get Paid Either Very Little, or a Whole Lot

When a Chapter 7 filed, the Covington Division charges a $335.00 fee as of January 2018. All Northern Kentucky based Chapter 7 Trustees make a flat fee of $75.00 from that filing fee. Chapter 7 bankruptcies are divided into two kinds of cases: “no asset” bankruptcies, and “asset” bankruptcies. In a no asset Chapter 7 bankruptcy, the debtor’s personal property is protected by property exemptions that protect those assets from seizure by the Trustee. This means the debtor’s property is safe, and the Trustee is stuck with only a $75.00 fee for all his or her work.

Chapter 7 bankruptcies with assets are where the question of fees gets interesting. While the filing fee and the flat fee described above remain the same, the Trustee can also get paid a percentage of any assets seized from the debtor. Hearing about assets getting seized sounds scary, but remember that a good bankruptcy attorney will be able to tell you before you file that no assets will get seized. The Trustee’s allowed compensation on seized assets is set forth in federal law, and the Trustee is paid in a stair step method as follows:

  • The Trustee is paid 25% up to the first $5,000;
  • The Trustee is then paid 10% on any amount in excess of $5,000 but not in excess of $50,000;
  • The Trustee is then paid 5% on any amount in excess of $50,000 but not in excess of $1,000,000, and;
  • The Trustee is then paid “reasonable compensation” not to exceed 3% on any amount in excess of $1,000,000.

Let’s assume the debtor in a Chapter 7 bankruptcy has two cars, but can only protect one using the property exemptions. The Trustee will take possession of the other car, and sell it. If the car sells for $20,000.00, the Trustee will get paid 25% of the first $5,000.00 (which is $1,250.00), and then 10% of the next $15,000.00 (which is $1,500.00). That adds up to $2,750.00 of fee for the Trustee, and the remainder of the car’s sale price goes to the bankruptcy’s unsecured creditors.

Notice that the fee schedule for Chapter 7 Trustees has no maximum on the amount that a Trustee can earn. Therefore, anyone with a large, seize-able asset might wind up paying a Chapter 7 Trustee very richly indeed. The types of things that can be considered a seize-able asset might surprise you. We’ve written before about how a personal injury lawsuit can be considered a bankruptcy’s asset, and how a large verdict or settlement designed to compensate a badly injured person can wind up being partially drained by the Trustee’s fee. Chapter 7 Trustees used to be held to a “reasonableness standard” – i.e. any fee they take had to be reasonable, even if the fee schedule mathematically produced a higher result. However, at least Covington based Chapter 7 Trustee has argued that he should no longer be required to take only reasonable fees. If that view holds out, a Trustee’s fees could run into the tens or hundreds of thousands of dollars.

For most people reading this article, a Chapter 7 bankruptcy will cost $335.00 in fees, and that is it. The Trustee will be paid out of that. But make sure – absolutely sure – that your attorney has confirmed no assets can be seized, or you could wind up paying the Trustee a lot of extra money out of your own pocket.

Chapter 13 Trustees Are Paid Out of the Monthly Payments into the Bankruptcy

Chapter 13 Trustees are also paid according to federal law, and unlike Chapter 7 Trustees, their fees are far more consistent. Every Chapter 13 bankruptcy is an “asset” bankruptcy, because the main reasons people file Chapter 13 bankruptcies is to stop foreclosures, stop repossessions, or because they have high income. Therefore, you don’t see the wide variation in fees earned that you see for Chapter 7 Trustees.

A Chapter 13 Trustee’s fee is a percentage on all payments made into the Chapter 13 plan, and that percentage is set by the U.S. Attorney General’s office. The Trustee cannot deviate from that percentage, and is therefore incentivized to make sure the payments into the plan are the maximum allowed by law. Conversely, a good Chapter 13 bankruptcy attorney will attempt to make a Chapter 13 plan payment the minimum required by law.

The Chapter 13 Trustee for the Covington division of Kentucky’s bankruptcy courts is the Chapter 13 Trustee for the entire eastern half of the state. As of January 2018, that Trustee is will only approve Chapter 13 plans if the plan payments calculate an 8% payment to the Trustee on all payments into the plan. While we cannot say for certain that the Trustee actually takes the 8% fee, that is the best guideline we have as to the percentage taken by the Trustee.

Therefore, if a Chapter 13 Plan requires 36 months of payments in the amount of $400.00 each month, that is a total of $14,400.00 in payments over three years. Of that $14,400.00, we can expect the Chapter 13 Trustee to take a fee of about $1,152.00, with the remainder going to various creditors. Again, the amount of the monthly plan payment is subject to a lot of factors, and a good attorney often finds it necessary to look at everything from your mortgages to your credit card statements to find the exact amount. But once that amount is set, so too is the Chapter 13 Trustee’s fee.

If you have any other questions about this topic, please call our Fort Mitchell, Kentucky office at 859-371-5997. We are one of the largest bankruptcy filers in Northern Kentucky and we have helped over 3,000 clients. We’re Working Hard for the Working Class, and we want to help you!

*Northern Kentucky includes the following counties: Boone, Kenton, Campbell, Gallatin, Grant, Pendleton, Bracken, Mason, and Robertson. Each of these counties reports to the federal court in Covington.

Last Updated : February 20, 2019
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