What do I do if the bankruptcy trustee is demanding I return some of the collateral?

This would relate to the holder of the security interest and not the trustee. It is incumbent upon the declared lien holder to demonstrate a valid security interest. You may then have the option of redeeming the property for its current market value. As opposed to the case with motor vehicles, for example, holders of security interests in much-depreciated personal property like electronics or lower-end jewelry are not prone to invest in actual recovery. Contact your bankruptcy attorney for more information. This answer (as well as our Web site) doesn't address all facts & implications of the question; it's general info, not legal advice to be relied upon; it creates no attorney-client relationship; it may be pertinent to CA only; it's independent of other answers.

If you do not have the asset there is nothing that they can do to collect it.

You have a serious problem which you should have addressed in your case. More precisely, your lawyer should have. If you didn't use one, see one now to see the implications of your mishandling of this.

If a creditor has a security interest in the collateral you have 3 choices. One, you can return it and owe nothing. Two, you can redeem it by paying the value of it, in cash and in full. Three, you can enter into a reaffirmation agreement to pay the balance in monthly payments. If you no longer have possession of the collateral you can tell them where it is so they can pick it up.

First of all, this is not from he trustee. Were you represented in your BK? If so, you should not be receiving the letter, as you are a represented person. This is from a lawyer representing the secured creditor. Write the lawyer and tell them you don't have the collateral anymore. That should settle it.