How is the chapter 7 trustee paid?

There are basically three sources of compensation for a chapter 7 trustee: (1) $61 out of the $306 filing fee the debtor paid to file the case with the bankruptcy court; (2) compensation for making distributions to creditors; and (3) attorney's fees charged against the bankruptcy estate. In a no-asset chapter 7, where the debtor has claimed all of his or her property as exempt and there are no other recoveries to be had for benefit of creditors, only the first source of compensation is available.

Why does this matter to the bankruptcy debtor?

In short, understanding the motivations of a chapter 7 trustee is helpful for the debtor planning a case. When a trustee administers a no-asset chapter 7, he or she is compensated only that minimal $61 fee. Most trustees are fortunate to be able to cover staff and overhead with that fee, let alone pay themselves anything for their time. So, when a debtor has a legitimate no-asset case, its a priority to file a clear and complete petition and bankruptcy schedules. Trustees get grumpy when they waste time asking for clarification that could have been provided upfront.

Cases with assets can provide substantially more compensation for the trustee. Unsurprisingly, this gives the trustee incentive to aggressively pursue assets and avoidable transfers (see also why do transfers matters?). While sometimes limited by the bankruptcy court, compensation is more-or-less a percentage commission for the trustee. The more they distribute to creditors, the more they get paid. When the trustee pursues litigation to increase the funds available for creditors, the trustee is also able to pay his or her attorney, which in many cases is his or her own firm.