Bankruptcy Audit: What It Is and How It Works

Most bankruptcy filers provide accurate financial information to the court. But mistakes happen. Sometimes they’re accidental. Sometimes they’re deliberate.

The U.S. Trustee Program hires outside auditing companies to review select bankruptcy petitions. These audits help catch errors and prevent fraud.

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What Is a Bankruptcy Audit?

A bankruptcy audit reviews your financial documents for accuracy. After you file, your case might be randomly selected for audit. Or it might be flagged if something looks unusual.

The U.S. Trustee’s Office checks your documents during the audit. They compare your income and expenses against your bankruptcy forms. Everything must match.

Mistakes or dishonesty can derail your case. You need accurate information from the start. If you’re considering bankruptcy, speak with a bankruptcy attorney for free to ensure your paperwork is correct.

Who Conducts Bankruptcy Audits?

Every bankruptcy case gets assigned to a trustee. The trustee works for the U.S. Trustee’s Office. The office is part of the Department of Justice.

The U.S. Trustee Program helps prevent bankruptcy fraud. Audits are one way they do this.

The program reviews all bankruptcy filings for red flags. Only a small number get full audits. Third-party auditing firms handle these detailed reviews.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires these audits. They look for major errors or false information. Intentional lies can lead to criminal charges.

In Alabama and North Carolina, an administrator oversees cases instead of a trustee.

Which Bankruptcy Cases Get Audited?

The U.S. Trustee Program only audits consumer cases. Chapter 7 and Chapter 13 cases qualify for audits.

Some cases get flagged because something looks unusual. Income or expenses might be much higher or lower than normal. These are “red flag” audits.

Most audits are picked at random. Anyone could be selected. Random selection keeps everyone honest.

What Happens During a Bankruptcy Audit?

The program designates cases for audit within 10 days after filing. A private audit firm gets assigned immediately. The firm conducts the actual audit, not the program.

The audit firm notifies you or your attorney right away. You’ll receive a list of required documents.

Required Documents

You’ll need to provide several documents:

Tax returns for the past two or more years
Pay stubs or income documentation for at least six months before filing
Bank statements for all accounts going back six months or more
Documents related to property you sold, gave away, or transferred within two years before filing

You must send all information to the audit firm within 21 days. The firm also searches public records in your county. They check for additional assets or transfers in your name.

The firm verifies that your bankruptcy forms are accurate. If your paperwork is substantially correct, you don’t need to do anything. If they have questions, they’ll contact you.

The Audit Firm’s Report

The audit firm files a report with the bankruptcy court when finished. The U.S. Trustee’s Office receives a copy too.

The report states whether the firm found material misstatements. Misstatements can involve your income, expenses, or assets. If they found none, your case proceeds normally.

If the report contains findings of material misstatements, you must explain them to the court.

The firm files a Report of No Audit if you don’t provide requested information. The program may ask the court to deny or revoke your bankruptcy discharge. The firm also files this report if your case gets dismissed during the audit.

What Happens if the Auditor Finds Something?

You usually get a chance to fix the situation. Honest mistakes or miscalculations just need corrected forms. You may need to amend your bankruptcy forms with correct information.

Sometimes correcting your paperwork isn’t enough. The program may ask you to explain the misstatement to the court.

If the court determines the misstatement was unintentional, you can amend your petition. Your case proceeds normally. If the court finds you lied intentionally, you’ll face consequences.

Possible Consequences

The court could take several actions:

Dismiss your bankruptcy case
Deny or revoke your right to a bankruptcy discharge
Refer your case to the U.S. Attorney for criminal prosecution
Apply all of the above penalties

Getting expert guidance helps you avoid these problems. Speak with a bankruptcy attorney for free to protect your case.

What Are Your Chances of Getting Audited?

Your chances of being selected for audit are fairly low. About 2 in 1,000 cases get audited based on recent figures.

In 2023, only 588 cases of 481,350 personal bankruptcy cases were audited. That’s less than 1% of all cases.

Your case is more likely to be audited if your numbers look unusual. Income or expense information much higher or lower than typical raises flags. These are called “exception” audits.

Of the 588 cases audited in 2023, 299 were exception audits. Another 275 were randomly selected.

How to Prepare for a Potential Audit

You can take steps to prepare even before filing. Accuracy is your best defense.

Keep detailed financial records. Store at least six months of pay stubs and bank statements. Organize your tax returns for the past two years. Document any property transfers or sales from the past two years.

Work with a bankruptcy attorney who understands audit procedures. They’ll review your paperwork before filing. Small errors caught early won’t become major problems later.

Be thorough and honest on all forms. Don’t hide assets or income. Don’t inflate expenses. The audit process is designed to catch these issues.

Respond quickly if you’re selected for audit. You have only 21 days to provide requested documents. Missing this deadline can result in a Report of No Audit.

Frequently Asked Questions

What is a bankruptcy audit?

A bankruptcy audit is a detailed review of your financial documents by a third-party auditing firm. The audit verifies that the income, expenses, and assets you listed in your bankruptcy forms are accurate. The U.S. Trustee Program requires these audits to prevent fraud and catch errors in bankruptcy filings.

How likely is my bankruptcy case to be audited?

Your chances of being audited are very low. In 2023, only 588 out of 481,350 personal bankruptcy cases were selected for audit. That's less than 1% of all cases. Your case is more likely to be selected if your income or expenses are unusually high or low compared to other cases in your district.

What happens if I don't provide documents for the bankruptcy audit?

If you don't provide all requested documents within 21 days, the audit firm will file a Report of No Audit with the court. The U.S. Trustee's Office may then ask the bankruptcy court to deny or revoke your bankruptcy discharge or take other action against your case.

Can I fix mistakes found during a bankruptcy audit?

Yes, you can usually fix honest mistakes or miscalculations by amending your bankruptcy forms. If the court determines your misstatement was unintentional, you can correct your petition and proceed with your case. However, intentional lies or fraud can result in case dismissal, loss of discharge rights, or criminal charges.

Who conducts bankruptcy audits?

Third-party auditing firms conduct bankruptcy audits, not the U.S. Trustee's Office directly. These firms are typically public accountants or similar professionals hired by the U.S. Trustee Program. The firms review your documents, search public records, and file a report with the bankruptcy court about their findings.

What Is a Bankruptcy Audit? Your Complete Guide