Does the Government Shutdown Stop Your Chapter 7 Bankruptcy?

The federal government shutdown impacts bankruptcy, but Chapter 7 Trustees are not federal employees. Learn if the lapse of funds affects estate settlements, asset liquidation, and creditor distributions.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Introduction: The Federal Government Shutdown and Chapter 7 Bankruptcy

A federal government shutdown immediately creates fear and uncertainty across the economy, especially for those in the middle of a bankruptcy case. If federal courts are on “essential status” and staff are furloughed, many debtors panic. Does this mean the entire Chapter 7 liquidation process comes to a halt?

While a shutdown certainly causes delays in the federal and bankruptcy court system, the day-to-day work of managing your Chapter 7 estate, for the most part, remains intact. This is because the bankruptcy trustee who handles the estate is not a federal employee and continues to work.

However, there could be delays in motions and court orders being signed, depending on the bankruptcy judge’s schedule. Let’s break down the functions of the Chapter 7 Trustee during a shutdown and exactly where the process slows down.

The Essential Distinction: Why Your Trustee Keeps Working

Understanding why the Chapter 7 Trustee continues to work on your case has to be distinguished from the U.S. Trustee’s Office.

The Chapter 7 Trustee is a Private Contractor:  A bankruptcy trustee is an attorney or other professional who is appointed to a panel by the U.S. Trustee’s Program. They are compensated by fees taken from the bankruptcy estate’s non-exempt assets, not by a federal government salary. Therefore, they are not furloughed.

The U.S. Trustee (UST) is a Federal Employee: The U.S. Trustee’s Office is a branch within the Department of Justice. The UST’s Office oversees all Chapter 7 bankruptcy trustees. UST staff are federal employees and are largely furloughed during a shutdown.

However, for the bankruptcy trustee, if there are non-exempt assets in your case, the trustee will still be able to negotiate settlements and liquidate assets.

The Critical Delay: Freezing the Final Distribution

While the Trustee can do most of their job, the final and most important step, distributing the money, requires the bankruptcy judge.

1.  Trustee Files the Final Report: Once the Trustee has liquidated all assets and is ready to pay creditors, they must file a Final Report and Account with the court.

2.  Court Review and Order: The judge’s office (which is operating with skeleton staff) must review the report, and the Bankruptcy Judge must sign a formal Order of Distribution. The clerk’s office will also have a limited staff.

3.  The Choke Point: Due to furloughs, the review and approval of this final report is often delayed indefinitely. The court prioritizing “essential matters” like emergency filings (e.g., preventing an immediate foreclosure) means administrative functions, like issuing distribution orders in asset cases, fall to the bottom of the priority list.

The result is a “settlement freeze.” The funds sit ready, but the Trustee lacks the final court order needed to distribute the funds to creditors.

Special Consideration for Furloughed Federal Employees

The shutdown does present complications when the debtor is a furloughed federal employee.

Federal Employee as a Chapter 7 Debtor: A furloughed federal employee will have their income sharply reduced. This may temporarily affect calculations like the Means Test if they file during the shutdown. More importantly, the financial stress may force them to liquidate assets or raid retirement funds just to survive, which can complicate the debtor’s case.

Federal Government as a Creditor: If a debtor owes a federal agency like the IRS or SBA, that agency’s ability to participate in the settlement process, file claims, or negotiate with the trustee will likely be severely limited since employees will be furloughed.

The Professor’s Take

The federal government shutdown will not cancel your Chapter 7 settlement or permanently stop the Trustee’s distribution of assets. But there might be delays with orders being signed, including the distribution of funds.

If you are a creditor waiting for distribution, be prepared for a delay until a funding resolution is reached. If you are a debtor awaiting a discharge, the delay is most likely administrative.

Your best action is always to stay in close contact with your bankruptcy attorney to monitor the court’s public schedule and be prepared for a rush of activity once the government shutdown ends.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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