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Bankruptcy Audits Suspended Due to Tight Budget

A federal government program to audit bankruptcy filings is being put on hold due to budgetary constraints.

The U.S. Trustee Program (USTP) – part of the Justice Department – began auditing corporate and individual bankruptcies as part of Congress’s 2005 overhaul of the Bankruptcy Code. The USTP in March said it has “indefinitely suspended” the audits. This is not the first time a lack of funds has interfered with the program.

The 2005 law changes authorized the USTP to randomly select for auditing one of every 250 personal bankruptcy cases in each federal judicial district. The amendments also authorized audits of cases showing statistically unusual claims. Under the program, U.S. trustees select the cases, and independent accountants then conduct the audits.

According to a USTP report, the program saw audits of one of every 250 consumer cases per district. But in fiscal years 2008 – 2010, that rate fell to one of every 1,000 cases because of budgetary pressures. A temporary suspension of the program extending from late 2011 to early 2012 pushed those years’ numbers further down to one out of 1,700 cases and one out of 1,450 cases respectively.

Consumer credit industry associations lobbied for the audit program in an attempt to crack down on what its members saw as widespread fraud in bankruptcy filings. The audits review a number of financial documents, such as bank records, paychecks, tax filings and divorce settlements.

Industry groups including the Financial Services Roundtable (FSR), a group of executives at consumer finance firms, have previously asked Congress to increase the program’s funding. In an interview with The Wall Street Journal, Scott Talbot, a vice president at FSR, said the recent suspension concerns him.

“The audits are designed to catch and prevent abuse. The absence of the audits could lead to more instances of abuse of the Bankruptcy Code,” said Talbot.

Another group warned the suspension could negatively impact credit for consumers.

“Funding for bankruptcy fraud prevention is critical because it keeps the cost of credit affordable for everyone,” Karen Klugh of the American Financial Services Association told The Wall Street Journal.

But bankruptcy attorneys may feel differently. Henry Sommer, a bankruptcy attorney and past president of the National Association of Consumer Bankruptcy Attorneys, said the audits add significant time and expense to the bankruptcy process. They are “a real hardship,” he told the Journal.

With or without the threat of audits, an experienced bankruptcy attorney can help the process go smoothly and make sure debtors leave bankruptcy ready for a fresh financial start.

Posted on Monday, April 15th, 2013 at 8:54 am under Bankruptcy.
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