What happens if my bankruptcy case is audited by the U.S. Trustee’s Office (Department of Justice)?

Usually nothing.

(Chapter 13 cases get audited as well, but this blog article focuses on Chapter 7 cases).

Short answer:  If your case is above median and you draw an audit, they will ask for bank statements, tax returns, and paystubs to prove that you really do qualify for a chapter 7.  If you don’t, then they’ll move to dismiss your case. At this point, you can fight it (and lose), let it dismiss and try again, or even convert to a chapter 13.

Long answer:

When you file your chapter 7 case, the court assigns you an interim trustee.  This is the bankruptcy trustee that you have 99% of your dealings with.  Over him is the the U.S. Trustee’s Office, and they will periodically get involved in cases which are (1) above-median or (2) are referred to them by the regular trustees.

In my practice, when this happens, the U.S. Trustee will contact me, usually with the following email:

Dear Mr. Robert:

We have conducted a preliminary review of the Petition, Statement of Financial Affairs, Schedules and other documents filed in this case, pursuant to the United States Trustee’s duties under 11 U.S.C. §704(b), and have determined that we need additional information to complete our review. Pursuant to Bankr. D. Ut. LBR 2003-1(b) and 4002-1(b) please provide the information and copies of the following documents:
1) A copy of the Debtor’s most recent Federal and State tax returns with all attachments and Schedules (Please be sure to include a copy of the page showing itemized deductions claimed on that return (Schedule A), if applicable).
2) Copies of all payment advices received by the Debtor for the 6 months prior to the filing of bankruptcy (December 1, 2016 through May 31, 2017), including pension payments, social security payments, unemployment payments, etc.
3) Copies of check registers, canceled checks and bank statements from all financial institutions in which the Debtor maintained a financial account from December 1, 2016 through May 31, 2017.
4) A copy of the Debtor’s two most recent payment advices.
5) A copy of the Debtor’s Divorce Decree and/or Support Order.
6) The Debtor’s Statement of Intention shows he intends to retain his real property. However, his Schedule J lists no mortgage payment. Please explain the discrepancy between the two Schedules.
7) If any of the Debtor’s household expenses are not paid from his bank accounts, please provide verification of such expenses.

Please provide the response to xxxx@usdoj.gov by no later than Tuesday, July 25, 2017. If you have any questions concerning this matter, feel free to contact me at (801) xxx-xxxx.

The email looks scary, but it’s really not.  These are all numbers that you’ve already disclosed to your bankruptcy attorney, and if you are above-median, then you were probably expecting the audit.  The U.S. Trustee simply wants to verify the information you’ve provided.  Even better, they are professional, educated, and easy to work with.  They don’t want to trip you up and will be blunt and straightforward in their requests.  Your attorney will have no trouble dealing with them.  Unlike some other attorneys, they respond immediately to email and will actually answer their phones.

Being audited doesn’t mean that you’re in trouble.  It simply means that they are doing their job in a case where you may make too much for simple chapter 7.  Hopefully you do qualify for a chapter 7, and you pass the audit with flying colors.

If you don’t, then they will file a motion to dismiss.  You can fight it (and most likely lose).  You can convert your case to a chapter 13 and get on some kind of repayment plan with your creditors.  You can even let it dismiss out, plan a new chapter 7 with your attorney, and try again.

I have filed a lot of cases and have been audited over and over.  Sometimes I lose, but in most cases, the U.S. Trustee is satisfied with our documentation, and the clients receive a chapter 7 discharge.  The stories could make some fairly interesting blog posts, but not today.