Honesty and full disclosure are required to get a bankruptcy discharge, but the odds of your case being audited are low. One in 583 cases out of 1.4 million bankruptcies filed was chosen for audit in fiscal year 2009. Compare that with a little more than one in 100 tax returns audited by the IRS.
Auditors found “at least one material misstatement” in the paperwork of 496 cases (22 per cent of 2406 audited cases). We don’t know how many consumer debtors were denied their bankruptcy discharge or had negative outcomes in their quests for debt relief. The U.S. Trustee report does not tell us. It is believed to be few.
Definition of Material Misstatement – An inaccuracy or omission that compromises the integrity and reliability of the bankruptcy documents filed. Inaccurate or incomplete information deprives the court, the US Trustee, case trustees, and creditors of adequate information to decide whether to conduct further investigation, recover assets, or seek or impose relief against the debtor.
About half of the bankruptcy audits were randomly-selected audits. The others were exception or targeted audits of cases with income or expenses above statistical norms. The selection criteria is kept secret by the U.S. Trustee. “Material misstatements” were reported in 16% of the random audits and 28% of the exception audits.
If your case is selected for audit, you should know within 10 days after your petition is filed. Private audit firms are hired to compare the paperwork, called schedules and statements, with tax returns, bank statements, pay stubs and divorce documents. They run the debtor’s name through two computerized databases to search for unreported assets. If a “material misstatement” is found, the auditor offers the debtor the chance to explain or give more information. A Report of Audit is then filed with the bankruptcy court.
The bankruptcy court clerk sends notice to all creditors if a “material misstatement” is identified in the Report of Audit filed. “The report is not a legal determination and the legal effect of the auditor’s finding of a material misstatement, if any, is a question for the court,” the U.S. Trustee says. It is not clear how a debtor is to challenge the Report of Audit filed.
It is widely believed by debtor attorneys that most so-called “material misstatements” are not material (relevant and important) at all and result in no action being taken. Most discrepancies are simple errors and not intentional omissions or lies. The U.S. Trustee may seek may seek denial or revocation of bankruptcy discharge for fraud, make a referral to the U.S. Attorney if crimes have taken place, or do nothing.
The Bankruptcy Abuse Prevention and Consumer Prevention Act of 2005 (BAPCPA), authorized audits starting October 2006. The number of audits dropped sharply after 2007 when Congress cut funding. One in 614 bankruptcy cases were audited in fiscal year 2008 with 21% audit reports identifying “material misstatements”.
Blogger Peter Orville of Upstate New York attorney did a series of posts on audits that are worth revisiting:
- What have the bankruptcy audits found?
- What do I do if my case is chosen for audit?
- What is the time line for an audit?
- What does the audit firm do if my case is chosen for an audit?
- What if the auditor of my chapter 7 or chapter 13 case finds a material misstatement?
Generally, if you lie on your bankruptcy schedules, omit information or hide assets, you will be caught by the bankruptcy trustee appointed in your case, not by an audit of your paperwork. Cheating in bankruptcy causes you to lose property, to have your bankruptcy discharge denied, and to be prosecuted for federal crimes.
Filing for bankruptcy – don’t hide property
In bankruptcy, tell the truth, the whole truth and nothing but the truth
Don’t risk your bankruptcy discharge, list all your assets
13 FBI tips for filing bankruptcy
Statement of financial affairs and perjury
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Last modified: June 4, 2013