Federal law requires the United States Trustee to conduct audits of some Chapter 7 and Chapter 13 bankruptcy cases. If you are considering filing for bankruptcy, you should know what it means for the United States Trustee to audit a bankruptcy case, when they occur, and what happens if the U.S. Trustee audits your case.
When you file a bankruptcy case, the bankruptcy court appoints a bankruptcy trustee to administer your case. The bankruptcy trustee is not the U.S. Trustee.
The United States Trustee Program is the agency in the U.S. Department of Justice charged with overseeing administration of bankruptcy cases and bankruptcy trustees. There are 21 United States Trustees appointed by the Attorney General, one for each of the 21 geographical regions covered by the Trustee Program.
The U.S. Trustee Program operates under authority granted under federal laws. One of those statutes, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, requires the U.S. Trustee to audit a certain number of bankruptcy cases filed in each judicial district every year.
The U.S. Trustee can select a bankruptcy case for audit in one of two different ways. First, the Trustee randomly selects a limited number cases for audit each year. Your chances of being selected for a random audit are relatively small. While the law requires the Trustee to audit at least one of every 250 cases in each federal judicial district every year, random audits are limited to one out of every 1,000 Chapter 7 or Chapter 13 cases filed.
The second reason that the U.S. Trustee selects a case for audit relates to information in the bankruptcy filing itself that raises “red flags.” The term for this type of audit is an “exception audit.” Red flags include situations in which the debtor’s income and expenses vary significantly from statistical averages in other cases filed in the district. An exception audit may also occur if there are irregularities in the filing itself.
There are two steps to take that help minimize your chances for an exception audit:
If you take those steps, it will not guarantee that you will not face an audit, but you will be in a much better position if one does occur. In addition, if an attorney represents you, the attorney may be able to find out whether your case involves a random or exception audit. That knowledge can be very beneficial.
In most situations involving an audit, the U.S. Trustee sends notice of the audit within 10 days of the bankruptcy petition filing. If you filed your petition without the assistance of an attorney, and you receive an audit notice, you should talk with an experienced bankruptcy attorney immediately.
In random audits, the U.S. Trustee typically hires an outside audit firm to conduct the audit. In some exception audits, the U.S. Trustee’s office conducts the audit. The debtor does not pay for the cost of the audit in either case.
The audit notice includes a request for specific information, documents, and records. You are legally required to provide that information. You or your attorney must send that information to the audit firm within 21 days.
The audit firm uses the information you provide, as well as your bankruptcy petition and schedules, to verify your income, expenses, and assets. The auditor also conducts a public record search to determine whether you own any assets not disclosed in your filing.
The audit firm completes the audit within 21 days. The firm has 70 days from selection of the case for audit to file the audit report with the court.
The audit report does not contain legal conclusions about the audit firm’s findings. It only reports the factual findings about the debtor’s financial circumstances and details to the bankruptcy court.
The bankruptcy court and U.S. Trustee review the auditor’s findings to determine whether the debtor made any material misstatements on the bankruptcy petition. If the court does not find any material misstatements, the bankruptcy case proceeds normally. If the audit report identifies a material misstatement in the bankruptcy documents, the U.S. Trustee determines the next step in the process.
If the audit firm finds a material misstatement in your bankruptcy documents and financial records, you will have the opportunity to explain the discrepancy and amend your bankruptcy documents. If you are not able to explain the discrepancy satisfactorily, the U.S. Trustee’s office has several options.
For a Chapter 7 case in which the U.S. Trustee finds a material misstatement, the options include:
For a material misstatement of fact in a Chapter 13 bankruptcy case, the U.S. Trustee’s options include:
Additionally in some cases, a material misstatement in a bankruptcy filing can lead to criminal prosecution by the United States Attorney’s Office.
The very best way to avoid a U.S. Trustee audit — or to survive an audit — is to be completely honest and make full disclosure about your financial situation and assets in your bankruptcy filing. Doing anything less makes you vulnerable to not just an audit, but to other types of adversary proceedings in your bankruptcy case.
A solid strategy for making sure that your bankruptcy case goes smoothly in all respects should include representation by an experienced bankruptcy attorney. Your attorney will ensure that your petition and schedules are properly and thoroughly prepared and that all the information is correct and complete. In the event your case undergoes a random audit, your attorney will be able to navigate through the audit with you to achieve the best possible result.
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