When you file for Chapter 7 bankruptcy, the court appoints a bankruptcy trustee to administer (oversee) the case. If you have more property than you’re allowed to keep under your state exemption laws, the trustee will liquidate (sell) the assets you can't protect and distribute the funds to creditors according to the priority order established by bankruptcy law.

How Does the Trustee Pay Claims in Bankruptcy?

In a Chapter 7 case, the trustee is in charge of finding and liquidating assets for creditors. When ready to pay creditors, the trustee will file a report with the bankruptcy court requesting approval to do so.

The report—called the "Trustee's Final Report"—shows the amount collected, and the amounts proposed to be paid out to creditors. The report will show proceeds already paid, too.

Once the trustee gets court approval, the trustee will pay priority claims in the following order:

• administrative expenses
• domestic support obligations, such as child support
• wage and benefit claims of employees for the 180-day period before the bankruptcy filing
• security deposits owed to a tenant, up to a maximum amount set by statute
• particular pre-petition taxes and related penalties, and
• claims for death or personal injury you caused while operating a motor vehicle while under the influence.

After paying the priority claims, the trustee will pay general unsecured claims (all remaining debts) on a pro-rata basis. If funds remain after satisfying all claims in full, the trustee will return the balance to you. Find out about the different types of claims in bankruptcy.

What Is an Administrative Expense?

The highest priority of creditor claim is known as an administrative expense (a necessary cost incurred after the filing of your case). Administrative expenses often include fees for accountants, attorneys, or real estate brokers; employee wages; and taxes. The trustee pays administrative expenses first, before any other creditors.

The expense must arise post-petition (after you file your case) and be necessary for the preservation or administration of the estate to qualify as an administrative expense. It must also be reasonable. Here are examples of the most common types of administrative expenses.

• Wages. If you own a business as a sole proprietor, and you file for bankruptcy (or if the company itself filed the bankruptcy case), any unpaid wages, salaries, or commissions that the enterprise incurs after the bankruptcy filing are allowable as an administrative expense. Wages are considered a cost of preserving the estate because in most cases if a debtor is running a business with employees, those employees are needed to keep the business
• Any unpaid taxes incurred after you file your bankruptcy petition are allowable as administrative expenses, including property taxes, income taxes, and employment taxes. Any fines or penalties relating to such taxes are administrative expenses, as well. As with wages, paying post-petition taxes is a cost of preserving the estate because if you don’t pay taxes, the government can place liens on your property or take other collection actions that could reduce the amount available to pay pre-petition creditors. Keep in mind that this applies to property that will be sold for the benefit of creditors, only—not property that you’re entitled to retain for yourself.
• Other Creditors. A creditor can recover an administrative expense in certain cases, too. For example, if a creditor recovers property you transferred or concealed, the creditor can recover its actual and necessary expenses incurred in doing so. To receive administrative creditor treatment, the creditor must show that the bankruptcy estate, and not just the creditor, obtained a benefit from the recovery of the asset.
• Trustee fees. In Chapter 7 and Chapter 13 bankruptcy cases, a trustee will be appointed to administer your case and pay your creditors’ claims. A bankruptcy trustee is entitled to collect a commission on the funds paid out to creditors. The Chapter 7 trustee's commission, or trustee’s fee, is a percentage of the amount the trustee pays to creditors and is set by statute.
• Compensation to Trustee's Professionals. In administering a Chapter 7 case, the trustee may need to hire an accountant, attorney, real estate broker, auctioneer, or other professional. For example, if the trustee decides to sell your home or other real property, the trustee will need to hire a real estate broker and an appraiser. Also, the trustee might need to file motions or lawsuits in the bankruptcy court to recover assets, or to prosecute a lawsuit on behalf of the bankruptcy estate. For example, if you were a plaintiff in a personal injury case when you filed your bankruptcy (perhaps a lawsuit to recover damages arising from an automobile accident), the trustee could prosecute that lawsuit on behalf of the estate. Because the trustee will usually need to hire a lawyer to do this, the fees and costs for those professionals are all entitled to administrative status.

The role of the trustee is different in a Chapter 13 case. You’ll pay your creditors through an approved three- to five-year repayment plan. The trustee will distribute the funds to creditors.

To find out what a trustee might do in your particular case, you’ll want to speak with a bankruptcy attorney. You can find out how to prepare for your appointment by reading Bankruptcy: Preparing to Meet with a Lawyer and finding out how much you can expect to pay for a Chapter 7 or Chapter 13 case.