Chapter 7 Bankruptcy Trustee Questions A Stock Loss

During a recent chapter 7 341 meeting of creditors, the trustee inquired about a stock loss. The inquiry was a result of examining the debtor’s tax return for the current year and seeing a carryover loss of nearly $40,000. The trustee wrongfully believed that the debtor had sold or liquidated $40,000 worth of stock during the prior year. If that were the case, the trustee would be clearly within his rights to inquire as to what happened with those funds. However, the trustee did not comprehend the actual $40,000 loss on the tax return. There were no funds released to the debtor as a result of the stock sale. Rather, the sale of stock resulted in a loss that the debtor was allowed to carry over in future tax years pursuant to the IRS code.

What we witnessed was an overzealous trustee trying to make a case when one did not exist. The trustee made the debtor feel as if she had done something wrong. The trustee even went so far as to state that he may refer this matter to the United States Trustee for further inquiry. It is unfortunate that some trustees are unaware of their true duty. The chapter 7 trustee’s main job is to examine the debtor under oath with regard to assets, liabilities, income, expenses and the financial affairs of the debtor. The trustee is also charged with administering any non-exempt assets to provide a distribution to creditors pursuant to a chapter 7 liquidation case. Sometimes, when there are no assets to administer, the trustee will try to make things difficult or uneasy on the debtor. I believe that this is the case that we have with regard to the stock loss. This was a no asset case with nothing to recover. There was no referral to be made to the US trustee. Unfortunately, the trustee missread or misunderstood the ability to carry forward stock losses.

If you hire a professional to handle your financial affairs such as preparing your federal and state income tax returns, you can rest assured that those returns will pass the scrutiny of a bankruptcy trustee. In this particular case, the trustee was not aware of the laws with regard to carrying forward losses and simply thought that the debtor had sold $40,000 worth of stock within the prior year for cash money. If this were the case, then the trustee would be correct in trying to determine where those funds were or how they were exhausted prior to filing. That simply was not the case for this debtor.

Unfortunately, some chapter 7 trustees are going to make life a little more difficult on the debtor that it has to be. The debtor is already going through a struggle, a financial hardship and oftentimes an emotional hardship for having to file a chapter 7 bankruptcy. Wouldn’t it be great if some of the trustees took that fact into consideration?  Thankfully, the debtor had good counsel at her side to refute the efforts of the Trustee.

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