Nothing puts debtors attorneys in a good mood quite like a juicy story about some tacky debt settlement “law firm” racket getting busted up and fined. It happens all the time and the stories themselves are largely interchangeable: little old lady X hires debt settlement law firm Y to settle her debts, but all law firm Y does is apply little old lady X’s monthly payments toward the payment of their exhorbitant legal fees. A more perfect villain this side of the Death Star is hard to think of.
Another common feature of these stories is the role of the trustee in the little old lady’s inevitable bankruptcy case. In these stories, the bankruptcy trustee is often cast as the Man In The White Hat who rides into town, spurs sparkling, to represent the debtor and sue the pants off of the mean old debt settlement firm. But what’s in it for the trustee? Why is the trustee suing the debt settlement firm instead of the debtor’s attorney?
The truth, of course, is that the trustee is suing the debt settlement firm because it is the trustee’s job to liquidate assets of the debtor. He isn’t doing the little old lady a favor, he’s taking one of her assets and turning into cash just the same as if he were selling one of her non-exempt vehicles. And when he turns the claim into cash, the money won’t be going to the debtor, it will be going to her creditors. After the trustee is paid for his work, of course.
No one (including us) fault the trustee for doing this. He is doing what trustee’s are paid to do. But it is important to remember that, for a claim of action to be exempt from liquidation by a trustee, it must be related to personal injury or wrongful death. If the debtor’s claim against another party is simply related to an economic injury, she should be prepared to either litigate and turn that claim into money prior to her bankruptcy case, or else be prepared to surrender the right to payment to the trustee.