Pay for Chapter 7 trustees has not changed since ‘95

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A bankruptcy trustee pulls up to a drive-through window at a local fast food restaurant.

While someone could assume the trustee and restaurant employee might share a mutual affection for french fries, few would expect the two earn similar wages.

But in some instances, the compensation a bankruptcy trustee working on a complex Chapter 7 case receives is not that far removed from the $6.50 per hour a minimum-wage worker in Wisconsin makes.

That is because since 1995, the fee a trustee earns for work on a Chapter 7 case has remained at $60 per case.

“You simply cannot make a living as a trustee,” said bankruptcy attorney Paul G. Swanson, who has been on the panel of trustees in the Bankruptcy Court for the Eastern District of Wisconsin for 26 years.

A piece of legislation pending in the U.S. Senate could increase the income level for trustees, but in the meantime, Swanson and other panel members say the prolonged low standards could imperil the system.

Though none of the 12 trustees on the panel in the Eastern District has resigned, several are nearing retirement and Swanson questioned whether there will be anyone willing to replace them.

“To be honest, if I were just starting out today, I wouldn’t do it,” said Swanson, who practices at Steinhilber, Swanson, Mares, Marone & McDermott in Oshkosh.

Time Is Not Money

Swanson spent a decade on the board of directors for the National Association of Bankruptcy Trustees and witnessed a decline in the number of attorneys who did trustee work in other states.

“There are a lot more people on the bubble,” said Swanson, largely because the compensation standards do not meet the time investment for attorneys.

Bankruptcy attorney Virginia E. George, who has been on the panel since 1999, suggested that most, if not all, of the trustees in the Eastern District have considered quitting at one time or another.

“What we hear from the U.S. Trustee is, if we don’t like it, and if you can make more on the private side, resign,” said George. “I guess he’s right. That’s the alternative.”

While many cases take less than an hour, others can take significantly longer, said Swanson, depending on the circumstances. Collection of pay stubs, tax returns and mortgage documents can take time to gather, in addition to the liquidation of assets in a case.

“Say I charge $300 an hour regularly and a trustee case is $60,” said Swanson, who spends 20 percent of his practice time as a trustee. “That comes out to about 12 minutes of my time spent in private practice, and it’s usually at least 45 minutes for a trustee case.”

Adding to the frustration is a 2005 change in the law that allows debtors to request a filing fee exemption, known as In Forma Paupers (IFP). When granted by a judge, the trustee in the no-asset case does not get paid at all, because compensation comes directly from the filing fee.

George estimates that she personally invests 15 hours of lawyer time and her staff spends another 25 hours working through a calendar of 40 cases.

“If only 30 of those result in payment, what do I really have to show for it?” said George, who spends about a third of her practice time doing trustee work.

George said the sharp decline in Chapter 7 cases after the new law took effect in 2005 forced her to lay off two staff members and temporarily cut the hours of another who primarily helped with trustee cases.

So what exactly is the motivation for doing trustee work?

Consistent if not Lucrative

Bankruptcy Attorney Bruce A. Lanser said that in his experience, there is usually no shortage of trustee work and it serves as a nice fall-back when there are fewer clients in private practice.

“Even though the income does not compensate me for my time, at least it’s reliable income,” said Lanser, who has been on the panel since 1990. “About 50 percent of my practice is spent on trustee work, but it does not translate to 50 percent of my income.”

Lanser said someone doing trustee work needs to ask the question of whether or not the trade-off is worthwhile.

“If a lawyer knew he or she could sustain their practice with non-trustee work, there is not a tremendous incentive to remain on the panel.”

The potential for an asset case coming on the calendar is also an incentive, although rare, according to Swanson. Such cases involve non-exempt assets, from a tax refund or the sale of Brett Favre memorabilia, which a trustee liquidates and then earns a percentage of the money collected.

Lanser and George said they have worked on cases which earned each thousands of dollars in commissions, but both said there are cases which demand substantial time and result in little reward.

“In your mind, you tell yourself that one big case makes up for the ones where you have to do 50 hours of legwork for very little compensation,” said George.

New Legislation

Perhaps the biggest incentive is the promise of a higher wage for no-asset cases, which make up the bulk of a trustee’s calendar. A provision in the U.S. Senate version of the Judicial Pay Restoration Act calls for a $60 increase in the per-case compensation for trustees.

Unlike past proposals, which provoked opposition from groups like the National Association of Consumer Bankruptcy Attorneys (NACBA), the new one does not seek an increase in filing fees to pay for the trustee’s raise.

“We have always said we support added compensation, as long as it doesn’t come out of the pockets of debtors, who are already affected by the $100 increase [in 2005],” said NACBA President Henry Sommer.

Sen. Richard J. Durbin, D-Illinois, co-presented the bill and spokesman John Normoyle said the legislation is “likely to pass at some point this year.” A companion bill in the House of Representatives does not include a provision to increase trustee compensation.

Normoyle also said that the source of funding has yet to be determined, but it will not be from an increase in the filing fees.

Swanson said he is cautiously optimistic that the bill will advance, but until it does, he expects more attorneys will give up their trustee practice.

“If it gets passed, that makes things a little more tolerable, but if I was told it’s going to stay at $60 for the next 5 years, I’d probably say I’m out of there,” said Lanser.