What Is a Chapter 7 Bankruptcy Audit?

Like our annual tax filings, the majority of us want to avoid a bankruptcy filing like the plague. But, just like the tax system, there are those among us that try to game the bankruptcy system to their advantage. And bankruptcy courts, just like the IRS, will occasionally audit filings to weed out fraud and misrepresentations.

While not all bankruptcy filings will be audited, the possibility that your Chapter 7 filing might be is a powerful deterrent to fudging any numbers regarding your assets or your income. Here's what you need to know about a possible Chapter 7 bankruptcy audit.

Odds of an Audit

Your chances of being audited are fairly slim, but may depend on where you live and your filing. The United States Trustee Program, a division of the Department of Justice, is responsible for overseeing the administration of bankruptcy cases, and federal law limits the Trustee's office random audits to one out of every 1,000 Chapter 7 or Chapter 13 cases filed. (There are over one million Chapter 7 cases filed every year.) On the other hand, the Trustee's office must audit at least one out of every 250 cases in each of the 94 federal judicial districts.

The Trustee's office may also flag your Chapter 7 filing for audit if there are irregularities in the filing, or if the income or expenses listed are far outside the norm from other filings in the same court.

Procedure of an Audit

Once a Chapter 7 filing has been selected for audit, you will be notified and the case will be handed over to an auditing firm who will review the filing and may ask for additional documentation to support your income, expense, and asset statements. You (or your counsel) are required to comply with all document requests regarding the audit, but you're not responsible for incurring any of the audit costs.

The audit firm will review the Chapter 7 filing and all supporting documents for any material misstatements regarding assets, income, or expenses and submit a report to the bankruptcy court.

Consequences of an Audit

If the court finds there are no irregularities in the Chapter 7 filing, it will proceed normally. If, however, the court determines there were material misstatements in the filing, it could dismiss your case, deny or revoke your ability to obtain a debt discharge, or refer your case to the Justice Department for criminal investigation.

Bankruptcy filings are not to be taken lightly. Talk to an experienced bankruptcy attorney near you if you are considering filing.

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