The United States Trustee Program (USTP), an arm of the Justice Department, has announced on its website that effective March 10, 2014, bankruptcy audits will resume for certain consumer debtors. These audits had been suspended in March, 2013, due to budgetary constraints.
Bankruptcy audits are part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which directs bankruptcy trustees to identify cases for audit to uncover fraud. Cases with unusual income or expenditures may be identified for audit. Trustees may also randomly designate for audit one out of every 250 consumer bankruptcy cases. Bankruptcy audits are performed by independent accounting firms.
Budget limitations have significantly limited the number of random audits, until the activity was suspended in 2013. According to USTP reports, the random audit rate for the last full fiscal year (2011) was only one out of every 1,700 cases. It is unknown whether the USTP budget will allow random audits of one out 250 cases.
When a case is chosen for audit, the debtor or debtor’s attorney is notified. The debtor and/or his attorney must cooperate with the auditor, and must provide any requested information or documentation within 21 days. There is no cost to the debtor for the auditor’s investigation. The auditor will verify income, expenses, and assets reported in the bankruptcy schedules and statements, and issue a report to the bankruptcy court within 21 days. The bankruptcy court then reviews the findings of the audit and determines if the debtor made “material misstatements” on the petition.
If an audit identifies material misstatements in in the debtor’s case, creditors and the bankruptcy court are notified. The debtor then has an opportunity to explain the misstatements. The “next step” could range from nothing, to denial of discharge, to referral to the U.S. Attorney’s office for criminal prosecution.
Bankruptcy audits are serious, but often routine – so long as the debtor has provided truthful and accurate information. The information provided on the bankruptcy petition and schedules, and the answers given to the trustee during your 341 meeting are made under oath, and subject to civil and/or criminal perjury penalties. Your attorney can keep you out of legal trouble, but only if you are honest during the bankruptcy process.