As recently reported in the Wall Street Journal, the U.S. Trustee recently announced a resumption of audits of consumer bankruptcy cases to start March 10. Those audits had been suspended due to budgetary constraints. Under federal law, the U.S. Trustee is authorized to contract with independent outside auditors to determine the truthfulness and accuracy of bankruptcy documents prepared by consumer debtors. As a practical matter, about 1 out of every 1,000 cases is selected for an audit.
As part of the audit, the debtor is required to provide to the auditor (1) pay stubs for the six-month period immediately prior to the filing of the petition, (2) federal income tax returns for the two-year period immediately prior to the filing of the petition, (3) financial account statements for the six calendar months preceding the date of filing and for the month of filing for every financial account in which debtor had an interest, (4) documentation explaining the source of every deposit or credit, and the purpose of every check, withdrawal or debit, and (5) any previous divorce decrees, settlement documents, and support orders. Failure to cooperate with the audit can result in the denial or revocation of discharge.
The auditor is then tasked with comparing those documents with the bankruptcy documents filed with the court to determine their accuracy. Following that review, the auditor issues and files with the court a report stating either that (1) no material misstatements were contained in the bankruptcy documents, (2) material misstatements were contained in the bankruptcy documents, or (3) a finding of material misstatement could not be determined. Unfortunately, “material misstatement” is undefined!
If a “material misstatement” is reported by the auditor, it is then up to the U.S. Trustee or another party in interest to take action. The most common action would be one for denial or revocation of discharge based upon “false oath” (i.e., perjury). If the misstatements are sufficiently egregious, the U.S. Trustee could report the matter to the U.S. Attorney for criminal prosecution.
As I discussed in a prior post, “the price of bankruptcy is full disclosure”. In light of the possibility of an audit, it is critically important that anyone contemplating the filing of a bankruptcy case be completely candid with his or her attorney, even if it leads to complications with a bankruptcy case. It is much easier to deal with difficult circumstances that are known ahead of time instead of trying to dig out of a whole because of failure to disclose information. It’s better to stay out of trouble as opposed to getting out of trouble!
This post is intended to be purely informational in nature, and cannot be considered legal advice. If you have questions related to bankruptcy audits, please call our office at (503) 545-1061 (Oregon cases) or (360) 836-4238 (Washington cases) to schedule a free initial consultation.