Bankruptcy law directs the U.S. Trustee (an arm of the Justice Department that deals with bankruptcy matters) to audit bankruptcy cases every year. Audits monitor fraud and prevent debtors from lying about their income and bankruptcy schedules. If your Chapter 7 or Chapter 13 case is audited, and the U.S. Trustee's office finds evidence of fraud or inaccurate information, it could lead to the dismissal of your case or even criminal penalties.
Until 2020, the U.S. Trustee audited fewer than 1,000 cases per year. For some years, it suspended the program due to budget constraints. In March 2020, the U.S. Trustee suspended the program due to the COVID-19 pandemic. As of this update, the U.S. Trustee has not resumed the audit program
(Learn more about the role of the U.S. Trustee in your bankruptcy case.)
Random selection and nonrandom selection are two ways that the U.S. Trustee selects bankruptcy cases for audit.
Random selection. Bankruptcy law permits the U.S. Trustee's office to randomly audit up to one out of every 1,000 Chapter 7 or Chapter 13 cases filed. It often chooses to audit fewer cases than this. However, it must audit at least one out of 250 cases in each federal judicial district.
Audit based on red flags in the petition. The U.S. Trustee will also audit bankruptcy cases in which the debtor's income and expenses greatly vary from those of most filers in their filing district. These are called exception audits.
In 2020, the latest year for which figures are available, the U.S. Trustee audited 1,049 random cases but suspended 357 that were scheduled for audit. They audited 347 exception cases and suspended 143.
Once the U.S. Trustee identifies a bankruptcy case for audit, it selects an audit firm to conduct the audit. The firm will review the debtor's petition, schedules, and documents. Individual Chapter 7 or 13 debtors are typically selected for audit within ten days after the filing of the bankruptcy petition, and an audit firm is immediately assigned to the case.
Once the case is selected for audit, the debtor or debtor's attorney is notified that the case was chosen. At that time, they are also notified of the information or documentation the audit firm needs. Debtors must fully cooperate with the audit firm and promptly provide the additional information and records requested by the firm. The attorney or debtor has 21 days to send the requested items to the audit firm.
In a typical audit, the audit firm will verify the income, expenses, and assets in the bankruptcy schedules and statements. The debtor won't incur any costs for the audit, other than copying documents that the audit firm requests.
The audit firm is looking for any material misstatements of income, expenses, or assets. Some examples of material misstatements include hiding assets and making false statements to the bankruptcy court.
The audit firm has 21 days to complete the audit and submit its report or a "Report of No Audit" with the court. The auditing firm's report details the findings. The report is not a legal determination. It's up to the bankruptcy court to review the findings and determine if the debtor made material misstatements on the petition. (See the 2020 Debtor Audits report.)
According to the U.S. Trustee's audit report for 2020, audits uncovered at least one material misstatement in 14% of the random audits and 22% of the exception audits.
If the audit firm discovers any material misstatements, the debtor must provide evidence that reasonably explains those misstatements. This evidence must be provided to the audit firm within a reasonable amount of time.
If the debtor is unable to provide sufficient evidence to reasonably explain the problem, the court might:
The U.S. Trustee reviews all cases not chosen for audit. Audits and reviews find most of the misrepresentations that debtors make in their bankruptcy paperwork.
Hiding assets or misrepresenting income will likely lead to the dismissal of a debtor's case and possibly criminal prosecution, whether the U.S. Trustee discovers the misstatement or an audit firm does. Either way, misleading the bankruptcy court is not worth it.