03 Aug 2018

Chapter 7 Handbook: Do’s and Don’ts

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The Handbook for Chapter 7 Trustees is a valuable resource for the Trustee to reference as they execute their fiduciary duties under the United States Trustee’s supervision.

While it is a good practice to reference the Handbook throughout bankruptcy case administration, below are some highlights as well as do’s and don’ts for the Trustee practice.

*Note: The latest version of the Handbook can be accessed here.

DO: Keep strong passwords.

As the fiduciary of the bankruptcy estate, the Trustee must establish strong internal controls on all case administration duties, including maintaining unique passwords for the case management system and ECF for all authorized employees.

Below are some tips for maintaining strong passwords:

  • Create unique passwords that use a combination of words, numbers, and both upper and lower-case letters.
  • Change passwords periodically, even if it has not been compromised. The Handbook states that passwords must be changed at least quarterly, as well as when an employee leaves or no longer works on Chapter 7 matters.
  • Use a variety of security questions and answers across websites that request such information to verify the user identity or reset a forgotten password. (Handbook, 5-2.)

DO: Send timely DSO Letters

The Handbook states that the Trustee must provide two statutorily written notices to the holder of a DSO claim and the appropriate State child support enforcement agency.

The Bankruptcy Code does not stipulate a required time to send the first notice; however, it is recommended that the Trustee send the notice no later than 3 business days after the meeting of creditors is held.(Handbook, 4-34.)

DON’T: Delete information off Forms 1 or 2

According to the Instructions for Form 1, assets and reference numbers may not be deleted from Form 1. To correct an asset listed in error on Form 1, the Trustee or employee should delete the description and enter an appropriate explanation such as “asset deleted by debtor amendment” or “asset entered in error.”

In addition, the Instructions for Form 2 state that Form 2 should contain all transactions from the beginning of the case until the end of the reporting period. If a transaction was entered in error, the Trustee should void the transaction with a description of the error instead of deleting the transaction.

DO: Avidly Maintain Receipts Log

The Trustee is required to maintain a separate Receipts Log in the estate file in addition to any receipts provided to the payer. This may include a physical log of paper receipts within the Trustee office, or an electronic receipts log within the case administration software.

Other requirements for the Receipts Log include:

  • Checks must be immediately endorsed upon receipt.
  • Funds must be deposited as soon as possible after receipt – whether mailed or taken to the bank (preferably within two business days.)
  • If the funds cannot be deposited immediately, they must be disposed of within 30 days after receipt, or in a case requiring a court order for disposition, 21 days after entry of the final order.
  • If the case will not be administered as an asset case, the Trustee must keep a copy of the check with the cash receipts log. (Handbook, 5-3.) 

DON’T: Discard or leave out unprotected copies of a debtor’s tax returns

The Trustee must ensure that all copies of a debtor’s tax returns in their possession are destroyed following the meeting of creditors – whether by shredding hard copies, or permanently deleting electronic copies. (Handbook, 5-20.)

DO: Follow proper procedures for wire transfers

In general, wire transfers must be approved by the court in advance. However, there are special circumstances in which a wire transfer may be used without prior approval, including:

  • Immediate payment is necessary to prevent loss to the estate or injury to a person or property, and the person to whom the payment will be made will not accept an estate check.
  • Wire transfer is required by applicable law or regulation.
  • Payment must be made to an overseas creditor or foreign corporation.
  • The court order approving the transaction requires that the Trustee make the payment by wire transfer (the Trustee should oppose the routine inclusion of such requirements in court orders.) (Handbook, 5-11.) 

DO: Obtain separate TINs and file separate tax returns for joint estates

If spouses file a joint petition under section 302, absent substantive consolidation, two separate estates and two separate taxable entities are created.

If tax returns are required for the joint estate, the Trustee must obtain a tax identification number (TIN) and file a tax return for each estate. (Handbook, 4-8.) 

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