If you find that your Bankruptcy case is being reviewed by the United States Trustee it is not necessarily a bad sign but it is something you will want to discuss with your lawyer. It might seem especially scary if the first you hear about it is a notice of a Rule 2004 Examination or request for documents, with no explanation of what they are looking for. Even worse, the last time the U.S. Trustee reviewed one of my cases, they electronically filed a motion to extend the time to object to my client’s discharge at about 11:45 p.m. – fifteen minutes before the midnight deadline. This was after the first meeting of creditors and the Chapter 7 Trustee had already entered a no-asset report. We did not know exactly what the U.S. Trustee’s office was looking for, but it was a higher income Chapter 7 client with several rental properties. The attorney for the U.S. Trustee took the Rule 2004 deposition and told us at the conclusion that he had no issues in the case and we expect a discharge soon.
There are a few reasons that the U.S. Trustee might want to review your case in a little more detail. One reason is that the U.S. Trustee’s office is supposed to conduct random audits on consumer cases. Since 2005, they have been required to conduct random audits of at least one out of every 250 Chapter 7 or Chapter 13 cases. However, during a time they ceased the random audits due to the federal budget problems, and in other years they have only audited about 1 in 1,000 cases. As of earlier this year (2014), they have resumed the random audits. We cover the random audits, and what you may be asked to provide, in this post. A second major reason the U.S. Trustee may audit a case is where there is something in the Schedules that stands out relative to other cases. For example, my client discussed above had much higher income than the average Chapter 7 filer so his case was flagged. Others may have expenses that are out of the ordinary, or claimed certain debts were business expenses when it was not clear the really were. The most important factor in getting through an audit with flying colors goes back to the filing of the case: simply make sure that the Schedules are complete and accurate. If there are significant material errors, such as omitting income to meet the Means Test, problems will follow if they are determined to be intentional. According to U.S. Trustee reports, they found material (not necessarily intentional) errors in about 20% of cases that they audited. This illustrates the necessity of hiring a good, experienced Bankruptcy lawyer who will take the time to go through the Schedules as many times as necessary to make sure they are as correct as possible. I have had many cases over the years where I spent more time working with my clients on the Schedules than any other single task in the case. One final point – An audit as discussed here is not the same as an investigation into misconduct, Bankruptcy fraud or whether the Debtor should be denied a discharge. An audit can certainly lead to a further investigation, but this discussion is intended on referring to the random audits or the cases which are flagged simply because they stand out from the pack for some reason.