When you file for bankruptcy, the court appoints a neutral Bankruptcy Trustee to administer your case and review the information contained in your bankruptcy petition. A small percentage of bankruptcy cases are selected each year to be further reviewed or audited by an independent public accountant or audit firm. This is referred to as a Bankruptcy Audit.
The Bankruptcy Audit
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), October 17, 2005 to be exact, requires a certain amount of bankruptcy cases filed in each judicial district to be audited by an independent public accountant or audit firm. The purpose of a bankruptcy audit is to verify the accuracy of the information disclosed by the debtor in his or her bankruptcy petition. If you are selected for a bankruptcy audit, the audit firm will review your bankruptcy petition and financial information for any “material misstatements” of income, expenses, assets or transfers of property usually within the last 2 years.
If your case is selected for a bankruptcy audit, you will typically receive a notification from the Bankruptcy Administrator’s Office within a couple of weeks of the filing of your bankruptcy petition. You will be required to provide several financial documents to the independent firm conducting the audit. This is usually tax returns for the 2 years preceding your case filing, bank statements and paystubs for the 6 months preceding your case filing and bill of sales or contracts for any real or personal property you have transferred within the 2 years preceding your case filing.
Once the audit firm receives your documents, it will compare them against the information you filed in your bankruptcy petition. The audit firm will also conduct their own search of the Probate Court Records of the County in which you reside to look for any assets (Land, Homes, Mobile Homes, Car Titles, Boat Titles, etc.) that might be associated with your name that were not disclosed in your bankruptcy petition. After completing its initial review, the audit firm may have additional questions on any ambiguous information provided and they will give you a chance to explain those questions to them.
Findings of the Bankruptcy Audit
Once the audit firm has concluded their investigation it will issue an audit report and file it with the Court. If the audit confirms that your petition is substantially correct then you are good to go and your case proceeds toward your desired result of discharge of your debts.
However, if the audit report reveals any material misstatements you will have to explain them to the Court. If you satisfy to the Court the misstatements were made in error and not intentional, you will just need to amend your bankruptcy petition to correct the mistakes and then you will be good to go and your case proceeds toward discharge.
However, if the Court determines that you intentionally lied on your bankruptcy petition, your case will likely not be allowed a discharge and your case may be referred to the United States Attorney’s Office for criminal prosecution.
Who Receives a Bankruptcy Audit
Overall, the chance of your bankruptcy petition being audited is very low. BAPCPA initially required that at least one out of every 250 bankruptcies filed in each judicial district be randomly selected for an audit. Currently, due to budgetary restraints that amount is actually a little lower. However, not all cases are selected randomly. If your case has certain red flags such as higher than normal income or expenses, you will have a greater likelihood of being chosen for a bankruptcy audit. BAPCPA authorizes audits of debtors whose income or expenses vary greatly from the statistical averages of the majority of the debtors in your district.
As you can see it is important to have an attorney who will carefully navigate you through the Bankruptcy process. At Bond & Botes we treat every case as if it will be selected for audit and we are very diligent with our clients to make sure their petition is accurate. Please call one of our conveniently located offices to set up a private consultation with one of our experienced attorneys.
We will analyze your situation and help you make the best decision possible to help you navigate your financial problems.
Grant McNutt is a Managing Attorney at the Bond & Botes Law Offices in Florence and Haleyville, Alabama. He holds a Bachelor of Science from the University of Alabama, and a Juris Doctorate from the Birmingham School of Law. He has been practicing Consumer Bankruptcy Law since 1999.Read his full bio here.