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U.S. Trustees Forced to Stop Auditing Personal Bankruptcy Cases

The Great Recession, or perhaps the federal sequester, has forced the U.S. Trustee Program to indefinitely suspend the audits it is required to perform on Chapter 7 and Chapter 13 personal bankruptcy cases. The audits are required by the 2005 bankruptcy reform law called the Bankruptcy Abuse Prevention and Consumer Protection Act, but apparently even bankruptcy trustees can't keep things going without money.

The U.S. Trustee Program, or USTP, is a division of the Justice Department, and it spends most of its time managing bankruptcy estates and auctions. The 2005 bankruptcy law, however, tasked the agency with arranging to have 1 in every 250 consumer bankruptcies audited. This was in response to banking industry claims that individuals and families were filing innumerable Chapter 7 and Chapter 13 bankruptcies using false or misleading documentation -- just to get out of paying debts they knew they owed and were perfectly capable of paying off.

While those allegations were never actually proved, the law was passed and the USTP was ordered to have those audits performed, and they contracted them out to independent accountants.

As early as 2008, however, the USTP found that level of auditing was unsustainable under its budget, and the number of audits dropped to 1 in every 1,000 personal bankruptcy cases. In 2011 and last year, the agency suspended the audits altogether for two three-month periods. When it was having the audits done in 2012, the average rate had dropped to 1 in every 1,450.

Were the audits actually finding or preventing abuse? That itself is highly questionable, according to some sources. For example, a former president of National Association of Consumer Bankruptcy Attorneys who now represents especially poor debtors for free points out that no one really knows what the USTP has been finding. In the audits, they're looking for "material misstatements" of fact, such as false financial statements or the omission of important assets from the filings.

"We have tried to get the [USPT] to tell us what a material misstatement means," he told a reporter from the Wall Street Journal. "They find a material misstatement in a significant percentage of the cases, but after they find that, they don't do anything to the debtor in virtually all of those cases."

Indeed, according to the WSJ, in the last fiscal year the USTP says the audits found material misstatements in 25 percent of the cases. The trustees acknowledge that, while they notify the bankruptcy court, they rarely take any other action.

Source: The Wall Street Journal's Bankruptcy Beat blog, "Bankruptcy Watchdogs Suspend Debtor Audits," Jacqueline Palank, April 1, 2013

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