Random Bankruptcy Audits Stopped
Random audits of consumer debtors in bankruptcy cases have stopped.
"Due to budgetary constraints, the USTP has indefinitely suspended its designation of cases subject to audit." Source: U.S. Trustee notice.
The auditors looked for "material misstatements" in consumer debtors' bankruptcy schedules by comparing the documents to tax returns, bank statements, pay stubs and divorce decrees. The protocol for the audits and the definition of "material misstatement" was kept secret from debtors and their attorneys.
Debtors were perplexed by the so-called "material misstatements" found by the auditors. Often, their attorneys said the reports were erroneous, the misstatements were not misstatements at all. The auditors lacked understanding of bankruptcy and were abusive to debtors, their attorneys claimed.
Audits Show Precious Little Fraud
"Audits of randomly selected bankruptcy cases conducted show little or no fraud on the part of debtors," Cathy Moran wrote in aprevious BLN post. "The audit results so far support what debtors' attorneys have said all along: debtors are overwhelmingly honest on their schedules."
While about 25% of 1351 audits found "material misstatements," rarely was anything done about the findings other than to report to the Bankruptcy Court. It is believed by consumer advocates that few debtors were denied a discharge or prosecuted for bankruptcy fraud as a result of the audit outcomes.
Audits Curtailed Before
This is not the first time the audits were halted. In 2008, the audits were suspended when Congress did not fund them. They resumed later that year at a reduced rate. The risk of being audited in a consumer bankruptcy case was always low and has fallen in recent years. In fiscal year 2012, 1351 audits of chapter 7 and chapter 13 consumer bankruptcies were conducted out of 1.2 million cases filed.
The audits were added to bankruptcy law in 2005 in Section 603(a) of Public Law 109-8, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) after creditors convinced Congress there was rampant fraud and abuse by consumers filing bankruptcy.
Most Debtors Honest
The vast majority of Americans who file bankruptcy are ordinary people in bad circumstances, many of whom had experienced health issues, job loss or divorce. They cannot pay their bills through no fault of their own. They are good, honest folks who are granted the much needed relief they seek.
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