Bankruptcy Watchdogs Resume Debtor Audits

Federal bankruptcy watchdogs are once again patrolling in full force, restarting the consumer debtor audits that a tight budget forced them to suspend last year.

The U.S. Trustee Program—the arm of the Justice Department that monitors corporate and consumer bankruptcy filings—announced on its website that it will resume ordering audits of certain consumer debtors on March 10. The program indefinitely suspended the audit program last March due to budgetary constraints, as Bankruptcy Beat previously reported.

When Congress overhauled the Bankruptcy Code in 2005, it directed bankruptcy watchdogs to ferret out fraud by auditing consumer debtors. U.S. trustees may randomly designate for audit one out of every 250 consumer bankruptcy cases per federal judicial district. The Bankruptcy Code also authorized audits of any cases in which debtors posted statistically unusual income or expenditures. Trustees select the cases but don’t perform the audits; instead, that job falls to independent accountants.

If auditors identify a “material misstatement” in their review of a debtor’s financial information, creditors will be notified and the bankruptcy court will be notified. It’s up to the individuals involved in the case to determine what, if anything, happens next.

Last year wasn’t the first year that a tight budget affected the audits. The 2007 fiscal year (Oct. 1, 2006, to Sept. 30, 2007) saw random audits of “at least one out of every 250 consumer cases” per judicial district, according to a USTP report. But the following three fiscal years saw that rate reduced to one out every 1,000 consumer cases per district due to “budgetary constraints.”

The auditing rate was reduced even further in the 2011 fiscal year to one of every 1,700 cases, but the audits were suspended for the last few months of that year and through the first three months of the 2012 fiscal year. While USTP resumed random audits between January and October 2012, it did so for one out of every 1,450 consumer case per district.

Write to Jacqueline Palank at [email protected]. Follow her on Twitter at @PalankJ.