What happens if you file bankruptcy and get audited by the Bankruptcy Trustee? If you happen to be one out of the 250 debtors that get audited (lately 1 out of 600), you will be selected at random within your judicial district or will be chosen for audit because of other internal established criteria by the USTP (United States Trustee Program). This criteria has to do with having income or expenses greater than normal for the district when the case is filed. Audits on debtors are created as a vigilant check the integrity of the bankruptcy system and all parties involved in the bankruptcy process.
The audit is an information comparison between items on the debtor’s filed schedules and documents produced by the debtor upon the request of an independent audit firm. The audit firm is looking for undisclosed or misreported assets. In other words, for unreported assets and undervalued assets of the debtor’s filed petition and schedules. Material misstatements are reported by the audit firm to the United States bankruptcy trustee. The debtor has the due process right, through counsel, of providing additional information that may negate the finding or offering an explanation as to the misreporting or non-disclosure. All creditors in the bankruptcy case are given information the debtor’s material misrepresentation, omission or pre-petition transfers of property.
What can happen? The USTP or the creditors may determine that additional action is appropriate based upon the material misstatements and they can pursue a variety of actions depending on the facts and circumstances of the case. The best practice is to gather, make and file a complete, accurate petition and schedules while disclosing all transfers as requested in the bankruptcy forms and documentation. Material misstatements include income related misstatements. In addition, there are also asset misstatements and transfer related material misstatements.