In Chapter 7 or 13 bankruptcy cases the court assigns a Bankruptcy Trustee to manage the case. This includes reviewing the information on the documents for accuracy and any fraudulent information. The trustee gathers the debtor’s information such as income, creditor information, and assets, to figure out what are dis-chargeable debts and which are not. During this review a trustee will look for any fraudulent information or items that may raise red flags. From there a small percentage of cases are selected to be audited by an independent public accountant or audit firm. As if bankruptcy doesn’t sound intimidating enough, now the word audit is being bantered about! Let’s examine what is a bankruptcy audit and what happens now?
What is a bankruptcy audit?
An audit is when the U.S. Trustee decides to further investigate a bankruptcy petition. This is done with the goal of monitoring fraud and preventing debtors from lying about their income or schedules.
Why do audits occur?
In the past, a majority of audits were chosen at random. Due to budget constraints, the Office of the U.S. Trustee announced in 2013 that it would stop conducting random audits of bankruptcy cases. This means that audits are now mainly conducted on cases with unusual income or expenditures that raise questions by the trustee. Fear not! A vast majority of bankruptcy filers do not lie or commit fraud so this will most likely not happen to you. As long as you have not willfully withheld or lied about information in your bankruptcy case do not panic!
What happens in an audit?
During a typical audit, an independent firm will verify the information in your petition for bankruptcy such as your income, expenses, and assets. They will also do a search to see if there are any assets under the debtor’s name that were not listed in the bankruptcy filing. The audit firm has 21 days to review the information and submit a report to the court. They will be reporting to the court whether they found any “material misstatements.” If the misstatements appear to be unintentional there are usually no negative consequences. However, if close scrutiny determines that the misstatement was intentional the bankruptcy case could be dismissed or potentially refereed to the US Attorney for a further criminal investigation.
What is the result of most audits?
Most debtors these days are honest people whose existence has been altered by some financial reversal . . . the loss of a job, an unforeseen medical situation, downsized. If your case is audited, the likely result is no action.