Saturday, November 18, 2006

New Bankruptcy Audit Requirements Announced for Southern California

When Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), one of the reforms included a requirement for random audits of case files. The guidelines for debtor audits for cases in San Diego County and Imperial County have been finalized.

Commencing with cases filed by individual debtors on and after October 20, 2006, Chapter 7 and Chapter 13 cases will be selected for audit pursuant to §603 of the Bankruptcy Code. According the Office of the United States Trustee, these audits will be focused on determining the accuracy, veracity and completeness of petitions, schedules and other information provided by debtors.

Cases will be selected both randomly (one out of at least every 250 cases filed for the Southern District of California) and based upon debtor's income or expenses having a greater than average variance from the statistical norm for the district. The audits will be performed by independent firms selected by the United States Trustee using auditing standards developed by the United States Trustee Program (the "USTP"). These Debtor Audit Standards have been published in the Federal Register and are posted to the USTP's website at:

The Office of United States Trustee will send a letter to Debtor's Attorney, or a pro se Debtor, indicating that a case has been selected for audit, enclosing a form for the attorney to indicate whether the audit firm can directly contact a represented debtor about documents and an information sheet about the audit for the debtor. The letter will also identify the firm that will be conducting the audit and the documents that must be produced to the audit firm. These documents include the following:
  • Pay stubs for the six calendar months prior to filing;
  • Two years of federal tax returns, including any schedules and forms;
  • Account statements for all depository and investment accounts for the six calendar months preceding the date of the filing of the petition, plus the month in which the petition was filed, along with sufficient documentation to reasonably explain the source of deposits or credits, and the purpose of checks, withdrawals or debits; and
  • A copy of any divorce decree and/or property settlement entered within the last three years, and any current child support/alimony obligation involving the debtor.

Debtors will have 21 days to provide the audit firm with the requested documents. Debtors must cooperate with the audit firm and provide records to the auditor. A debtor's discharge may be revoked if the debtor does not satisfactorily explain the failure to make available all documents or property requested by the audit firm.

Once the audit is complete, the audit firm will issue a report which must specify any material misstatements of income, expenses, or assets that identified by the audit firm. Before including a material misstatement in an audit report, the audit firm will contact the debtor's counsel, or the pro se debtor, in writing, notifying the debtor of the concern and offering the debtor an opportunity to provide an immediate written explanation for the item(s) in question.

Audit firms file the audit report with the court and transmit it to the United States Trustee. The clerk of court must send a notice to creditors in cases in which one or more material misstatements have identified in an audit report.

If material misstatements are not adequately explained by the debtor, the United States Trustee may take appropriate civil action and, where appropriate, make a criminal referral to the U.S. Attorney.

For more information regarding debtor audits, please contact us.

About the Author
Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

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