U.S. Trustees Will Resume Audits of Those Filing Bankruptcy

In March 2013, the U.S. Justice Department, the branch of the federal government that runs the U.S. trustee program overseeing corporate and personal bankruptcy filings, announced that it was suspending bankruptcy filing audits because of budget limitations. In February 2014, the Justice Department reported that it would resume the audits beginning on March 10, 2014. Those considering bankruptcy should be aware of what happens in a bankruptcy audit, as well as the facts surrounding the resumption of the audits.

Bankruptcy audits

In 2005, Congress overhauled the U.S. Bankruptcy Code. The revision included a provision obligating the U.S. Trustee's Office to conduct random audits of those filing bankruptcy. The goal of including mandatory audits of bankruptcy petitions was to prevent fraud and abuse in bankruptcy filings. Critics of the audits, however, maintain that the process adds time and expense to the bankruptcy process for those who can ill afford it.

Filers are either chosen randomly for an audit, or the audit can be triggered by suspicious information on a person's bankruptcy petition. The law allows the U.S. Trustee's Office to randomly audit one out of every 1,000 Chapter 7 and Chapter 13 bankruptcy petitions filed. The Trustee's Office must audit at least 250 petitions in each district per year. One of the things that can trigger an audit for cause is a filer's income and expenses varying greatly from those typical of bankruptcy petitions in the district.

When a bankruptcy petition is audited, the auditor compares the income, expenses and assets listed on the petition with records that the filer must provide to the auditor. The auditor is looking for "material misstatements" in filers' financial disclosures.

Reviving audits

While the auditing program had been suspended indefinitely in March 2013 because of lack of funds, the Trustee's Office is ready to resume audits as of March 10, 2014. The rate of audits had been falling prior to the suspension of the program because of budget constraints. In 2007, the Trustee's Office reported that it conducted audits on one petition per 250 petitions filed. That figure fell to one audit per 1,000 petitions filed for the following three years. In 2011, the figure fell further to one audit per 1,700 petitions filed. The Trustee's Office also temporarily suspended audits in 2012 because of funding problems. With the economy recovering, the Trustee's Office has money to resume audits.

Considering bankruptcy?

Those who are struggling financially may want to consider filing bankruptcy as a way to reorganize their financial situations and get back on their feet. However, they should be aware of the process before proceeding. Bankruptcy laws are complex, and people should not try to move forward with filing bankruptcy without the assistance of a seasoned bankruptcy attorney. If you are thinking of filing bankruptcy, speak with a skilled bankruptcy lawyer who can advise you on whether bankruptcy is your best option.