When you file for bankruptcy, the court appoints a neutral bankruptcy trustee to administer your case and review the information contained in your bankruptcy papers. In addition, a small percentage of bankruptcy cases are selected each year to be further audited by an independent public accountant or audit firm. This is referred to as a bankruptcy audit. Read on to learn more about red flags that can prompt a bankruptcy audit.
The U.S. Trustee recently suspended these audits due to budget issues (see below). But because they may be reinstituted again, you may want to learn about them.
For more information on the bankruptcy process, see Procedures in the Bankruptcy Case.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) requires a certain amount of bankruptcy cases filed in each judicial district to be audited by an independent public accountant or audit firm. The purpose of a bankruptcy audit is to verify the accuracy of the information disclosed by the debtor in his or her bankruptcy papers. If you are selected for a bankruptcy audit, the audit firm will review your bankruptcy papers and financial information for any “material misstatements” of income, expenses, or assets.
If your case is selected for a bankruptcy audit, you will typically receive a notification from the court within ten days of filing your bankruptcy. You will be required to provide your financial information (such as tax returns, bank statements, and paystubs) to the independent firm conducting the audit.
Once the audit firm receives your documents, it will compare them against the information in your bankruptcy papers. It will typically also conduct a search of public records and look for any assets in your name that were not disclosed in your bankruptcy. After completing its review, the audit firm will file a report with the bankruptcy court. If the audit reveals any material misstatements, you will be given a chance to explain them.
However, if the court determines that you intentionally lied on your bankruptcy papers, your discharge may be revoked or your case referred to the U.S. Attorney’s Office for criminal prosecution.
In general, the chances of your bankruptcy being audited are very slim. The BAPCPA mandated that at least one out of every 250 bankruptcies in each judicial district should be randomly selected for an audit. However, due to budgetary restraints, the U.S. Trustee’s Office has recently been designating approximately one in 1,000 cases for a random audit. However, not all cases are selected randomly. If your case has certain red flags, you will have a higher likelihood of being chosen for a bankruptcy audit.
As discussed, a certain number of bankruptcy cases are audited at random. However, in addition to the randomly selected bankruptcies, the BAPCPA authorizes audits of debtors whose income or expenses vary greatly from the statistical averages and norms of their judicial district. This is referred to as an “exception audit.” This means that if your income or expenses are significantly higher than other debtors in your district, you will have a greater chance of being selected for an exception audit.
On March 30, 2013, the Office of the U.S. Trustee announced that it would stop conducting random audits of bankruptcy cases. The indefinite suspension is due to budget constraints. To learn more, see the post on Nolo's Bankruptcy, Debt & Foreclosure blog.