Filing for bankruptcy is stressful enough without then receiving a letter that your case is being “audited”. The good news is that most bankruptcy audits are routine, and many are chosen at random. With the right preparation and legal guidance, you can get through the process smoothly and keep your case on track.
What Is a Bankruptcy Audit?
A bankruptcy audit is a closer review of your financial information to make sure your paperwork is accurate and honest.
In most consumer cases, the U.S. Trustee’s Office handles audits (or if in Alabama or North Carolina the Bankruptcy Administrator), or a court-approved auditor working under its direction.
An audit is not the same as the routine “341 meeting of creditors,” which takes place at the beginning of a bankruptcy filing. Instead, it usually involves requests for extra documents and a careful comparison of what you filed with your actual bank records, pay stubs, and tax returns.
Why Are Cases Selected for Audit?
Not every case gets audited for the same reason.
Random Audits
Each year, officials randomly select a small percentage of Chapter 7 and Chapter 13 cases for extra review.There does not have to be anything “wrong” with your case.The aim is to ensure the system operates correctly and individuals are honest.
Targeted or “For Cause” Audits
Some cases are selected because something in the paperwork raises questions. For example:
- Large changes in income right before filing
- Numbers on your schedules don’t match your tax returns or pay stubs
- Unusual or very high expenses
- Recent large credit card charges or cash advances
- Transfers of money or property to friends or family
Being selected does not automatically mean you did something wrong. It simply means your case requires more documentation.
What to Expect During a Bankruptcy Audit
If they audit your case, you will usually receive a letter explaining the selection of your case for review, the required documents, where to send them, and the deadline for a response.
Common documents requested include:
- Bank statements for several months before and after filing
- Pay stubs and employment records
- Tax returns
- Mortgage statements, car loan statements, and property records
- Credit card statements and other bills
The Trustee, Bankruptcy Administrator or auditor will then compare these documents to your bankruptcy schedules to see if everything matches.
Potential outcomes include:
- No further action: Everything is consistent; your case continues as normal.
- Requests for clarification or amendments: You may need to correct or update your paperwork.
- Further review: In rare cases involving serious inconsistencies or suspected fraud, the U.S. Trustee or Bankruptcy Administrator may ask the court to dismiss the case or take other action.
How to Prepare If Your Case Is Under Review
If you find out your bankruptcy case is under review, stay calm. Many audits are routine, and being selected doesn’t mean you’ve done anything wrong.
Contact your bankruptcy attorney immediately for guidance. They can review the notice, explain its meaning, communicate with the trustee on your behalf, and help gather and organize the requested financial records. Remember, honesty and transparency are crucial. Your attorney can help you address any issues that may arise. Respond promptly to all requests in the notice to avoid delays or penalties. With quick responses, accurate documents, and legal guidance, most people can navigate an audit and keep their case on track.
For decades, Brock & Stout has helped clients across the region file bankruptcy, respond to trustee questions, and successfully complete their cases. Contact us today to schedule a free consultation.