§ 42.11 — Audits by U.S. Trustee
Revised: July 3, 2007
One of the “Abuse Prevention” aspects of BAPCPA1 is this authorization of audits of bankruptcy cases by the U.S. trustee:
(f)(1) The United States trustee for each district is authorized to contract with auditors to perform audits in cases designated by the United States trustee, in accordance with the procedures established under section 603(a) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
(2)(A) The report of each audit referred to in paragraph (1) shall be filed with the court and transmitted to the United States trustee. Each report shall clearly and conspicuously specify any material misstatement of income or expenditures or of assets identified by the person performing the audit. In any case in which a material misstatement of income or expenditures or of assets has been reported, the clerk of the district court (or the clerk of the bankruptcy court if one is certified under section 156(b) of this title) shall give notice of the misstatement to the creditors in the case.
(B) If a material misstatement of income or expenditures or of assets is reported, the United States trustee shall—
(i) report the material misstatement, if appropriate, to the United States Attorney pursuant to section 3057 of title 18; and
(ii) if advisable, take appropriate action, including but not limited to commencing an adversary proceeding to revoke the debtor's discharge pursuant to section 727(d) of title 11.2
The implementation of this audit provision is delayed by BAPCPA until “18 months after the date of enactment of this Act.”3 The procedures referenced in the first quoted paragraph provide as follows:
(a) IN GENERAL.—
(1) ESTABLISHMENT OF PROCEDURES.— The Attorney General (in judicial districts served by United States trustees) and the Judicial Conference of the United States (in judicial districts served by bankruptcy administrators) shall establish procedures to determine the accuracy, veracity, and completeness of petitions, schedules, and other information that the debtor is required to provide under sections 521 and 1322 of title 11, United States Code, and, if applicable, section 111 of such title, in cases filed under chapter 7 or 13 of such title in which the debtor is an individual. Such audits shall be in accordance with generally accepted auditing standards and performed by independent certified public accountants or independent licensed public accountants, provided that the Attorney General and the Judicial Conference, as appropriate, may develop alternative auditing standards not later than 2 years after the date of enactment of this Act.
(2) PROCEDURES.—Those procedures required by paragraph (1) shall—
(A) establish a method of selecting appropriate qualified persons to contract to perform those audits;
(B) establish a method of randomly selecting cases to be audited, except that not less than 1 out of every 250 cases in each Federal judicial district shall be selected for audit;
(C) require audits of schedules of income and expenses that reflect greater than average variances from the statistical norm of the district in which the schedules were filed if those variances occur by reason of higher income or higher expenses than the statistical norm of the district in which the schedules were filed; and
(D) establish procedures for providing, not less frequently than annually, public information concerning the aggregate results of such audits including the percentage of cases, by district, in which a material misstatement of income or expenditures is reported.4
In addition, BAPCPA amended § 521(a)(3) and (4) to impose on Chapter 13 debtors the following new duties with respect to audits:
(3) if a trustee is serving in the case or an auditor serving under section 586(f) of title 28, cooperate with the trustee as necessary to enable the trustee to perform the trustee’s duties under this title;
(4) if a trustee is serving in the case or an auditor serving under section 586(f) of title 28, surrender to the trustee all property of the estate and any recorded information, including books, documents, records, and papers, relating to property of the estate, whether or not immunity is granted under section 344 of this title.5
Beginning October 17, 2006, Chapter 13 cases are subject to random audits by qualified persons on contract to the Executive Office of the U.S. Trustees. Audits are also required of schedules of income and expenses that exceed average variances from statistical norms for the district.6 The auditor is required to prepare a report that clearly and conspicuously specifies any “material misstatement of income or expenditures or of assets.”7 There must be a report of each audit filed with the court and transmitted to the U.S. trustee. If the auditor identified a material misstatement of income or expenditures or of assets, notice of the misstatement must be given to all creditors.
If the audit identifies a material misstatement of income, expenditures or assets, the U.S. trustee is instructed to report the material misstatement to the U.S. Attorney “if appropriate.”8 In addition, the U.S. trustee must “take appropriate action” if “advisable,” including an adversary proceeding to revoke the debtor’s discharge under 11 U.S.C. § 727(d).9 Of course, § 727(d) is not applicable in Chapter 13 cases, but “appropriate action” by the U.S. trustee is not limited by new 28 U.S.C. § 586(f).
Curiously, if a Chapter 13 case is selected for audit, § 521(a)(3) requires the debtor to “cooperate with the trustee” as necessary to enable “the trustee to perform the trustee’s duties.”10 There is no similar new duty that the Chapter 13 debtor cooperate with the auditor. If an auditor is serving, § 521(a)(4), as amended by BAPCPA, requires the debtor to “surrender to the trustee” recorded information, books, documents and records. There is no statutory requirement that the debtor surrender anything to an auditor.
The content and efficiency of the auditing process will be important. If being selected for audit by the U.S. trustee means voluminous document production and a significant time demand on debtors and/or debtors’ counsel, the auditing process will affect the cost of Chapter 13 cases and will delay the administration of any case selected for audit. Will trustees and bankruptcy courts allow debtors’ attorneys to spread the cost of auditing across all cases in the district, for example, by an incremental increase in “no-look” fees?11 If the auditing process is onerous, Chapter 13 debtors may reasonably choose to dismiss the case rather than pay in time and attorney’s fees for the privilege of being audited.
What will be a material misstatement for purposes of a U.S. trustee audit in a Chapter 13 case? Will audits include a visit to the debtor’s home by an agent of the U.S. trustee to verify personal property schedules? Will a Chapter 13 debtor selected for audit have to produce bank account records, billing information from creditors or the like? Will the Chapter 13 trustee go ahead with the ordinary processing of a Chapter 13 case that has been selected for audit? Or will selection for audit mean an automatic delay in confirmation—a bad outcome for everyone?
It can only be hoped that the U.S. trustee auditing process will be modeled to cause the least disruption possible in the administration of the Chapter 13 program. The typical Chapter 13 debtor does not have the resources to endure a significantly intrusive audit that delays confirmation of the case. It would be nonsensical for the random act of selection for audit to have the routine effect of destroying the Chapter 13 case altogether. Debtors’ lawyers will have the difficult task of designing representation for the Chapter 13 debtor whose case has been selected for audit in a way that adequately represents the debtor’s interest without crushing the case in new administrative expenses.
There is no procedure in BAPCPA for challenging the report of an auditor. There is every reason to expect that any process for auditing the income, expenses and assets of consumer debtors will be an imperfect process. A report of “material misstatements” noticed to all creditors and, perhaps to the U.S. Attorney, could be very damaging to a Chapter 13 debtor, especially if it is not accurate. A meaningful right to challenge the report of the auditor should be built into the auditing process.
1 See § 363.2 [ One: Those Who Can Pay Should Pay ] § 3.2 One: Those Who Can Pay Should Pay.
2 28 U.S.C. § 586(f).
3 Pub. L. No. 109-8, § 603(e), 119 Stat. 23 (2005).
4 Pub. L. No. 109-8, § 603(a), 119 Stat. 23 (2005).
5 11 U.S.C. § 521(a)(3), (4).
6 Pub. L. No. 109-8, § 603(a)(2)(C), 119 Stat. 23 (2005).
7 28 U.S.C. § 586(f)(2)(A).
8 28 U.S.C. § 586(f)(2)(B)(i).
9 28 U.S.C. § 586(f)(2)(B)(ii).
10 11 U.S.C. § 521(a)(3).
11 See § 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6 Debtors’ Attorneys’ Fees before BAPCPA.