Federal agency forced to stop audits of bankruptcy filings

In 2005, when the Bankruptcy Code of the United States was altered to grant more oversight of consumer bankruptcy filings, Congress charged the U.S. Trustee Program with undertaking the vast challenge of reviewing potentially fraudulent filings. If an in-debt individual claimed incomes or expenditures that were out of the ordinary, the organization of trustees would pinpoint the case and bring in an outside accountant to perform the audit.

However, the program has run low on funds, to the point that audits have been ceased. This move likely is only being made for the time being — but if the budgetary constraints on the organization are strict enough, a major overhaul to the system could be necessary.

There are a few issues with the process employed by the U.S. Trustee Program, and the first is that these audits, when they were being performed, took months to complete. It was a lot of time (and a lot of money) for an individual to spend defending themselves from the charge of bankruptcy fraud.

In addition, some of the language and justification for deeming a filing “fraudulent” has been criticized, making it that much more important for bankruptcy filers to retain their attorney through the bankruptcy process — and even beyond. Issues can arise even years after your bankruptcy is complete, and it is nice to be able to turn to someone with bankruptcy experience (both in general and with your specific case) to get through these challenges.

Another issue here is that it could cause abnormalities with credit for consumers. Without protections for bankruptcy fraud, it will be more costly, and more difficult, for people to secure lines of credit.

Source: Wall Street Journal, “Bankruptcy Watchdogs Suspend Debtor Audits,” Jacqueline Palank, April 1, 2013

Recent Posts