Chapter 7 Audits Return

Although it does not come with a great shock, debtor audits in Chapter 7 bankruptcy cases have returned. The U.S Trustee has commenced debtor audits as of May 12, 2008.

Isn't the U.S. Trustee technically doing debtor audits when bringing 2004 Exam Subpoenas? Isn't the U.S. Trustee already seeking tax documentation and proof of income through these 2004 Exam Subpoenas? Of course. However, they are not technically considered audits as mandated in Section 603(a) of Public Law 109-8, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Personally, I am still looking for the consumer protection portion of the Act. I know I saw it somewhere, but I just don't see how the consumers are really being protected. I suppose that the reaffirmation hearings are some sort of consumer protection. In reality, the reaffirmation hearings are simply an additional burden placed upon the debtor and the debtor's counsel. This often requires additional time off of work, but that's the debtor's problem. It will make it more difficult to make the required car payments.

I would have simply called the Act the Bankruptcy Code and I would have subtitled a section of that Code, Abuse Prevention. Anyway, sorry for my digression. The reason that the debtor audits were suspended was due to budgetary reasons. I suppose everyone associated with bankruptcy, including myself, is spending more money than they did prior to bankruptcy reform. As for the upcoming audits, they will be limited to 1 out of every 1000 cases as opposed to 1 out of every 250 cases as before.

Lastly, I don't recall how many cases were dismissed or how many discharges were denied due to a debtor's failure to pass the audit. Were these audits simply attempts to demonstrate the type and extent of abuse promulgated by debtors? If so, will the new audits make any significant difference?

The truth is simply that the U.S. Trustee is doing just what the Act mandates. Instead of blind adherence to the Act, some alterations should be made. The reforms laws may have looked good on paper to those who lobbied eight years for the changes. But looking good on paper and having an actual positive result are two different things. It's o.k. to admit that and to acknowledge that. Now, an effort should be made to smooth over the rough spots and to clarify some of the ambiguities. Otherwise, we will continue to wade in the minutia, all the while pretending to be walking on soft, sandy beach. If the debtor audits produced little fruit and if the cost of said audits was prohibitive, why not look to make a change. Throw it back to the lawmakers to make it right. If everyone works together, it can probably get done within the next eight years.