6 Things the Trustee Does When a Business Bankruptcy Goes to Chapter 7

The owner hands over the keys, and the business becomes someone else's assignment. In a Chapter 7 case, the person who holds them afterward is a trustee, chosen from a panel by the United States Trustee and appointed promptly once the case begins, whose statutory job is to turn what the company owned into money and to pay it out in the order Congress wrote down.

Owners tend to picture the case ending at the petition. For the trustee it is the first day. Six tasks follow, described here in roughly the order they arrive.

1. The Trustee Takes Control of Everything the Company Owned

The estate is broad. Section 541(a)(1) sweeps in "all legal or equitable interests of the debtor in property as of the commencement of the case," which for a business includes the bank accounts, receivables, inventory, equipment, deposits, claims against third parties, and the books and records that describe all of it.

The first duty listed in Section 704(a) is to "collect and reduce to money the property of the estate" and close the estate "as expeditiously as is compatible with the best interests of parties in interest." The company must cooperate with the trustee and surrender its property and recorded information. A trustee may keep the business running only when the court authorizes it, and a trustee who does so must file periodic operating reports with the court and the United States Trustee.

For an owner, this is the moment when access to the premises, the accounts, and the software logins stops being the owner's to grant.

2. Assets Are Sold, and Liens Are Paid From What They Secure

A trustee sells what has value, and what has value to the estate is only the equity above any lien. Under Section 506(a), a secured creditor's claim is secured to the extent of the collateral's value. A delivery van worth $30,000 subject to a $34,000 loan, to take a hypothetical, brings the estate nothing, while the same van with a $10,000 loan against it contributes $20,000 toward everyone else.

The trustee's aim is value to the estate, not the owner's preferred outcome for particular assets.

Equipment an owner considered essential, a customer list the owner regarded as the heart of the company, and a lease the owner hoped to transfer to a new venture are all the trustee's to market, and the owner who wants any of them must buy them on the same terms as anyone else.

3. The Trustee Questions the People Who Ran the Company

Section 704(a)(4) directs the trustee to "investigate the financial affairs of the debtor." The first formal occasion is the meeting of creditors, which Bankruptcy Rule 2003 requires the United States Trustee to call no sooner than 21 days and no later than 40 days from the order for relief. A company answers through its officers, under oath, and Section 343 allows creditors and the trustee to examine them.

The questions are practical ones. Where the receivables went, who holds the equipment titles, whether any payments went to relatives, what became of the second vehicle. The trustee compares the answers with the schedules and the statement of financial affairs the company filed, and with the bank statements.

You sign the schedules in an office, and then you explain them to a stranger who has read every line.

4. Transfers Made Before the Filing Can Be Pulled Back

Section 547 lets the trustee recover payments to creditors made within 90 days before the petition, or within a year if the creditor was an insider, where the company was insolvent and the payment let the creditor receive more than a Chapter 7 distribution would have given it. Section 548 reaches back two years for transfers made to hinder, delay, or defraud creditors or for less than reasonably equivalent value while the company was insolvent. Section 544(b) adds state voidable transfer law, with its own lookback.

The trustee does not win by filing. Since 2019, Section 547(b) has required the trustee to act "based on reasonable due diligence in the circumstances of the case" and to account for the creditor's "known or reasonably knowable affirmative defenses," which include payments made in the ordinary course of business or on ordinary business terms and, in a case like a company's where debts are not primarily consumer debts, transfers whose aggregate value is under $8,575, the figure in effect since April 1, 2025. Those defenses can make small payments hard to recover (the creditors who received them will insist that they were paid only what they were owed, which is true and is also the whole point of preference law). And where the suit is brought matters to the size of what can be pursued: under 28 U.S.C. 1409(b), a trustee seeking to recover a non-consumer debt of less than $31,425 from a noninsider must sue in the district where the defendant resides, which changes the economics of chasing a small payment across the country.

Recoveries go to the estate, not to the company or its owner. An owner who received distributions or loan repayments in the year before filing should expect the trustee to ask about them.

5. Improper Claims Are Challenged

Section 704(a)(5) directs the trustee, "if a purpose would be served," to examine proofs of claim and object to any that are improper. A claim that overstates the balance, duplicates another creditor's claim, or seeks amounts the contract does not support can be reduced or disallowed.

The statutory qualifier matters. When there is no money to distribute, an objection may serve no purpose at all.

6. The Money Is Paid Out in a Fixed Order, and the Case Is Closed

Distribution follows Section 726. Priority claims come first, in the order Section 507 sets: administrative expenses of the case, then, among others, employee wage claims up to $17,150 per individual earned within 180 days before the filing or the day the business stopped, whichever came first (the cap in effect since April 1, 2025), and specified tax claims, including withheld taxes. General unsecured claims come next, paid pro rata within their class. Late claims, fines and penalties, and interest follow, and only then does anything return "to the debtor."

A funder of merchant cash advances with no valid lien, whose claim is allowed as a debt, sits among the general unsecured creditors in this order, whatever its contract says about priority.

The trustee files a final report and account with the court and the United States Trustee, and the case closes. The company, which receives no discharge because Section 727(a)(1) grants none to an entity, is left with no assets and its unpaid debts. The last paper the trustee files is an accounting.

Before the Keys Change Hands

A Chapter 7 case is often the right ending for a company that has stopped operating or cannot continue, and an owner in that position should retain bankruptcy counsel, because an entity cannot file or appear in federal court without a lawyer. A settlement company cannot do that work.

For an owner still deciding whether the doors must close, and whose pressure comes mainly from merchant cash advances and unsecured business loans, a negotiated resolution is worth evaluating first. Delancey Street works on the settlement of business debt and is not a law firm; it does not file cases, and legal questions go to licensed attorneys who are independent of it. There is no fee for its first, confidential review.

Whoever ends up holding the keys, the records behind them will be read closely, and an owner who has kept them in order has lost less than one who has not.