One of the ways the court monitors bankruptcy cases for accuracy is through an auditing procedure. The court appoints a bankruptcy trustee to every case to review the information contained in the bankruptcy papers. But another level of examination exists, as well.
A small percentage of bankruptcy cases are selected each year to be audited by an independent public accountant or firm. Read on to learn about random audits, as well as red flags that can prompt a bankruptcy audit.
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Bankruptcy law requires auditing of a certain amount of bankruptcy cases by an independent public accountant or audit firm. The auditor verifies the accuracy of the information disclosed by the debtor in the bankruptcy papers.
The audit firm reviews cases selected for audit by examining the bankruptcy papers and financial information for any “material misstatements” of income, expenses, or assets. Typically, the debtor receives notification within ten days of the bankruptcy filing. The debtor will provide financial information, such as tax returns, bank statements, and pay stubs, to the independent firm conducting the audit.
After receiving the documents, the auditor compares the materials to the information in the bankruptcy papers. The audit also involves a public record search to find assets in the debtor's name. After completing its review, the audit firm files a report with the bankruptcy court. The debtor will be allowed to explain any material misstatements revealed by the audit.
If the court determines that the debtor intentionally lied in the bankruptcy papers, the consequences can be severe. The court could revoke the discharge—the order canceling qualifying debt—or refer to matter to the U.S. Attorney's Office for criminal prosecution.
Learn more about basic bankruptcy procedures.
The chances of a bankruptcy audit are very slim. In 2018, a total of 2070 bankruptcy cases were selected for auditing—a small percentage of the upwards of 700,000 bankruptcy cases filed.
The majority of the cases were randomly selected, but ultimately, as long as the debtor is judicially honest and forthcoming in the bankruptcy paperwork, there should be little cause for concern.
Audit reports appear on the U.S. Trustee website under Bankruptcy Data & Statistics. Select, “Public Report: Debtor Audits by the United States Trustee Program,” and the year of your interest.
Not all cases are selected randomly, however. A filing with certain red flags will have a higher likelihood of being chosen for a bankruptcy audit.
An "exception audit" occurs when the debtor's income or expenses vary significantly from the statistical averages of the judicial district. A debtor with considerably higher expenses will have a higher chance of selection for an exception audit.
You can get an idea about where you line up against other debtors by examining the expenses allowed in the means test—the Chapter 7 qualification standards. The actual budget listed in Schedule J: Your Expenses doesn't always match the means test figures. In fact, they're often higher. If your actual expenses exceed the norm significantly, you can expect to show proof of payment. Plan to demonstrate that you've paid the obligation for a reasonably extensive period, not just on the eve of bankruptcy.
You'll find current national and local expensed figures that you can use for reference purposes on the U.S. Trustee website.