US Trustee on Debtor Audits

Official U.S. Trustee Program Information Concerning Debtor Audits

“The United States Trustee Program is authorized to audit chapter 7 and chapter 13 bankruptcy cases filed by individuals. See Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, § 603, 119 Stat. 23 (2005) and 28 U.S.C. § 586(f).” This content is the official information sheet provided to debtors verbatim.

“A bankruptcy case may be randomly selected for an audit. In addition, a case may be selected for an exception audit if the debtor’s income or expenditures deviate from the statistical norms for the district in which the case was filed.”

“The audit involves the verification of the income, expenses, and assets reported by a debtor in the bankruptcy schedules and statements. A debtor is required to timely provide additional information and records and to cooperate with the audit firm. The debtor has no additional cost for an audit, except for the cost of making copies of required documents for the audit. The information that a debtor provides in connection with a case is subject to examination by the Attorney General or his designee. “

“Additional disclosures of the information may be to contractors engaged to perform debtor audits, to a bankruptcy trustee when the information is needed to perform the trustee’s duties, to the appropriate federal, state, local, regulatory, tribal, or foreign law enforcement agency when the information indicates a violation or potential violation of law, or to a credit counseling or debtor education provider when the information is necessary to enable the provider to perform its duties. Other disclosures may be made for routine purposes.”

“For a discussion of the types of routine disclosures that may be made, you may consult the United States Trustee Program’s systems of records notice, UST-001, “Bankruptcy Case Files and Associated Records.” See 71 Fed. Reg. 59,818 et seq. (Oct. 11, 2006). A copy of the notice may be obtained, at the following link: regulations/index.htm. “

“The audit firm will file a report containing the results of the audit. 28 U.S.C. § 586(f)(2)(A). If the audit firm finds material misstatements of income, expenses, or assets, the clerk of the bankruptcy court will notify the debtor’s creditors. 28 U.S.C. § 586(f)(2)(A). The report is not a legal determination, and the legal effect of the auditor’s finding of a material misstatement is a question for the court.”

“By statute, debtors are required to cooperate with the audit firm. See 11 U.S.C. § 521 (a)(3) and (4). Failure to cooperate with the audit firm, or failure to reasonably explain to the bankruptcy court any material misstatements contained in the audit firm’s report, may result in the dismissal of the case or the denial or revocation of discharge, and, possibly, referral of the matter to the United States Attorney for criminal investigation. 11 U.S.C. § 727 and 28 U.S.C. § 586(f)(2)(B).”

Alternatives to Filing Bankruptcy


Debt Settlement Scams

You are an honest person. You are desperate to find a way to pay your bills, but your paycheck just doesn’t stretch far enough.  You are robbing Peter to pay Paul.

You see commercials on TV and the Internet promising to solve your financial problems. Your guts tell you the “solution” is too good to be true, but you go against your instincts.

You were right! It is too good to be true!

Most of the debt settlement companies you see on TV or the Internet are illegal. Only a Kansas attorney or a credit services organization approved by the Office of the Kansas State Bank Commissioner can legally perform debt management services for a Kansas consumer. About 30 companies are approved. Most are not.

It is illegal for an unlicensed company to charge you a fee to take your money, hold it in escrow, not pay your creditors, then, once the debts are unpaid and delinquent for months, offer your creditors a partial lump sum settlement of the debt. These are debt settlement scams!

I posted about the Kansas consumer protection law on the Credit Law Network and the Bankruptcy Law Network.

Don’t despair. If you are paying an illegal debt settlement company, you might be able to get your money back. We can help you stop the automatic withdrawal from your bank account. We can demand a refund for you.

Legitimate Debt Management Plans

If you able able to pay your bills back through a debt management plan, contact Kansas consumer credit counseling services. Don’t send your hard earned money to out of state strangers you find on TV and Internet!

Housing and Credit Counseling, Inc., in Topeka, Lawrence and Manhattan

Consumer Credit Counseling Service, Inc., in Salina and Wichita

These two agencies can help you analyze your realistic ability to pay and can give you a frank assessment of your likelihood of success. They might be able to get creditors to voluntarily reduce interest, stop late fees and reduce monthly payments, but they probably won’t be able to get creditors to take less than you owe. Creditors cannot be forced to participate in a plan. Some creditors refuse. If you are lucky enough to have creditors who will cooperative, and you can pay your debts back at a`monthly rate you can afford, and you will have the bills paid off in a reasonable period of time, then you should consider a debt management plan through a Kansas credit counselor.

But if your creditors won’t agree to a debt management plan or the plan leaves you insufficient money to pay your necessities such as your housing, food, health care and transportation, you should consider filing for bankruptcy. You can expect these Kansas agencies to be be honest with you, even when they have to give you the bad news that a debt management plan won’t work for you. Both agencies are approved by the U.S. Trustee to issue bankruptcy certificates.


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Corporation Not Personal Piggy Bank, Bankruptcy Discharge Denied For Fraud

In re Karr, (Bkrtcy.D.Kan.) (Judge Somers Case No. 09-20008. February 24, 2011: Discharge – Intent to defraud could be inferred from circumstances surrounding diversion of funds. A Chapter 7 debtor’s conduct in the year preceding the bankruptcy filing of his wholly-owned corporation, in using the corporation as a piggy bank to pay personal expenses of himself and his family even as the company’s cash flow problems worsened and it was unable to pay corporate creditors, warranted a denial of the debtor’s individual Chapter 7 discharge under 11 U.S.C.A. 727(a)(7) on a fraudulent transfer theory. An intent to defraud corporate creditors could be inferred from circumstances surrounding the diversion of corporate funds, notwithstanding that the debtor did not attempt to conceal this diversion and testified, after-the-fact, that he intended to repay the corporation for any funds diverted.

Summary by West Highlights

Will The Bankruptcy Trustee Take My Tax Refund in Kansas?

A common question I get this time of year is whether the trustee will take the debtor’s tax refund if he files for bankruptcy.  The answer depends upon many factors.  Talk to your bankruptcy lawyer.  Don’t spend your tax refund until you know for sure your bankruptcy trustee does not claim it.  Spending a tax refund instead of paying it to the bankruptcy trustee can get you arrested.

The Trustee has a duty to administer non exempt assets if those assets are worthy of administration.  For a tax refund to be worthy of administration the refund must be large enough to justify the time and effort to take and distribute the money to unsecured creditors.

If you can wait to file bankruptcy, then often the simplest solution to the problem is to your return,  then receive and use the refund.  We do need to help you spend the refund in ways that will not jeopardize your bankruptcy case.  One huge no-no is paying back relatives with your refund.  You will get your relatives sued by the bankruptcy trustee, which is worse than not paying them back at all. You may use your refunds to pay for your bankruptcy and will be expected to do so.

However, waiting to file bankruptcy is not always possible.  If you are having your wages garnished or a garnishment is scheduled to begin, it may be necessary to file before a refund can be received.   Timing issues will also occur if a house is in foreclosure, or a car is about to be repossessed.

If you cannot wait for whatever reason, the following factors will determine whether the refund will be taken:

  • As previously discussed, is the amount of the refund worthy of administration?   This is an issue of local practice and will often vary from court to court and trustee to trustee.
  • Is any portion of the refund for Earned Income Credit?  Some states have specifically exempted Earned Income Credit.  It is necessary to check state law on this issue.  In Kansas, there is no exemption for Earned Income Credit so you lose it along with your tax refunds.
  • Does your State have a “Wild Card” or “Cash” exemption?  Some states allow a certain amount of cash to be treated as exempt from creditors, other states have what is refereed to as a wild card exemption that will allow a debtor to exempt an item that is otherwise not exempt.  Kansas has no such exemptions.

As can be seen the timing of a bankruptcy when a tax refund is expected depends on many factors.  Local practice and state law being the major considerations.

Consult us.  As your attorney, we will help you maximize the amount of tax refunds you can lawfully keep and minimize the amount you lose to the bankruptcy trustee.

Hat tip to my blogging colleague, Kevin Gipson of New Orleans, who wrote the original version of this post in Bankruptcy Law Network.

Can I File Bankruptcy Without an Attorney in Kansas?

Since the bankruptcy laws were changed in 2005, it is VERY HARD to file a bankruptcy petition without an attorney. The process is difficult and you may lose property or other rights if you do not know the law. The New York City Bankruptcy Assistance Project says, currently, about 9 out of 10 self-prepared bankruptcy petitions are being dismissed—that is, the debtor does not get relief from their debts.

Several Kansas debtors have ended up with federal criminal charges because they failed to disclose property and financial transactions in the bankruptcy cases they filed for themselves.

If you go ahead and file your case without an attorney (the court calls this pro se) and you make mistakes, you will spend more money to hire an attorney to fix your case than you would have if you had hired an attorney in the first place.  I once had a client with a cabinet business.  He thought he could not afford an attorney so he hired an out-of-state petition preparer over the Internet for $300.  The preparer was not supposed to give legal advice, but worse than no advice, he gave bad advice .  The cabinet maker filed a chapter 7 bankruptcy pro se and the trustee demanded shut down of his business, his way of making a living.

My cabinet maker had to borrow money from his father to pay me and to pay the trustee to settle his case and save his livelihood.  All of this drama could been avoided had he hired me from the get go.  It would have cost my client less and he would not have had to pay the trustee.

You can’t put the genie back in the bottle so your newly hired lawyer may not be able to fix all the damage you caused to yourself by filing a bankruptcy without an attorney.  For example, property rights are fixed on the date of filing of the bankruptcy.  If your chapter 7 trustee demands turnover of property, your attorney will not be able to change the date of filing.  It is too late for any prebankruptcy planning.  Your attorney might win a legal argument you didn’t make, but you’ll have to pay the trustee for your property to keep it, or lose it, if there is no valid argument to make.  You may have to convert to chapter 13 bankruptcy and pay for the property through a payment plan.

Warning: many attorneys will not accept a case after it is filed pro se by the debtor without an attorney so it may be difficult to find an attorney after your case is filed.

Debt Settlement Companies Fleecing Debtors

Peddling Relief, Firms Put Debtors in Deeper Hole

Video:  Unsettled Anxieties

Debt Settlement Plans Run As Fast As You Can

Kansans Fare Better on Bankruptcy Audits

Kansas debtors have less errors on their bankruptcy paperwork than the national average, according to the report just issued by the U.S. Trustee.  “Material misstatements” were reported in 12% of the audited cases, compared with 22% nationwide, although the report does not say just how serious the errors were.

The federal government audits bankruptcy cases just to keep everyone honest, but your odds of being selected are very low.  There were 19 cases chosen for audit in Kansas during 2009 fiscal year.  That is 19 out of 10,588 cases filed in Kansas, one in 557 cases.

Auditors filed Reports of Audits indicating at least one “material misstatement” in 17 Kansas cases.  Two cases had Reports of No Audit.  It is unknown whether any of these debtors did not get their discharges or had other negative outcomes because of the audits.  It also is unknown why Kansans fare better on the audits.

See my post on the Bankruptcy Law Network today explaining audits.

What If Debtor Destroys Collateral?

In re Murrow, Case No. 07-41061
March 2008, Judge Karlin

Creditor was give an additional time to amend its complaint. Debtor took the 5th but the intimation of the discussion in the decision is that debtor likely intentionally destroyed the vehicle but insufficient facts were alleged.

Digest by:  Jan Hamilton, Trustee

Debtor May Be Converted to 7 with No Discharge

In re Rogers, Case No. 08-21487
January 2009, Judge Somers

In a case in which assets may be liquidated, a 13 may be converted to a 7 even though debtors may not be eligible for a 7 discharge.

Digest by:  Jan Hamilton, Trustee

Foreclosure No Excuse for No Credit Counseling Before Bankruptcy

In re Thomas, Case No. 06-10242
March 2006, Judge Nugent
Pro se case dismissed for failure to obtain credit counseling. Certificate of exigent circumstances which recites pending foreclosure insufficient, case dismissed. 109(h)(1).

What Documents Do I Need for a Bankruptcy Audit?

One in 1000 bankruptcy cases are randomly selected by the U.S. Trustee for audit.  When that happens, the debtor is sent a letter requesting copies of the following documents:

  1. Payment advices [paystubs] from an employer covering the six calendar months preceding the date of filing for the debtor and the debtor’s spouse.
  2. Federal income tax returns, with all attachments, for the two tax years prior to the date of filing.
  3. Financial account statements for the six calendar months preceding the date of filing and for the month of filing for every financial account in which debtor had an interest; and documentation explaining the source of every deposit or credit, and the purpose of every check, withdrawal or debit.
  4. A divorce decree, property settlement orders going back three years and pending child support orders, if such documents exist.

The audits are supposed to find material misstatements in the bankruptcy paperwork. [Read more…]

What are Bankruptcy Avoidance Powers?

Avoidance powers: Rights given to the bankruptcy trustee (or the debtor in possession in a Chapter 11) to recover certain transfers of property such as preferences or fraudulent transfers or to void liens created before the commencement of a bankruptcy case. More on preferences.

What is an Bankruptcy Adversary Proceeding?

Adversary proceeding: A lawsuit filed in the bankruptcy court which is related to the debtor’s bankruptcy case. Examples are complaints to determine the dischargeability of a debt and complaints to determine the extent and validity of liens.

Video: What Happens at Bankruptcy Court Hearings?

Video: What are Bankruptcy Crimes?

Examples of bankruptcy crimes:

Fraudulent transfer of assets

Hiding property from the bankruptcy trustee

Making false statements in bankruptcy

Disobeying a bankruptcy court order

Video: Bankruptcy Won't Help With These Debts

What Is NOT Discharged in Bankruptcy  Video:  Running Time 4:34

Child support, alimony

Student loans

Most federal and state income taxes

Employer payroll taxes and sales taxes

Loans obtained by fraud or false pretenses

Liens on property such as homes and cars

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