When a consumer files for protection under the US Bankruptcy Code under Chapter 7 or Chapter 11 the requirements they face include disclosing all income, all expenses as well as any transfers or property that were made during the prior 12 months. In some circumstances, the Bankruptcy Trustee may try to void the transfer, particularly when Chapter 7 bankruptcy is involved. This is especially true of it appears the property was sold for less than a normal value. However, in some cases, these transfers are not disclosed but may be discovered later.
Bankruptcy Trustee role
The role of a Bankruptcy Trustee is to manage the bankruptcy but also to review the statements made by the debtor. One of their roles is to review all documents associated with the bankruptcy and determine if there are any material misstatements of assets, debts or income. The trustee is obligated to report any discrepancies and if necessary, oppose the filing. When a consumer fails to disclose transfers, the trustee may be able to identify the transfer through other means.
How are transfers found?
Bankruptcy Trustees generally will conduct a thorough audit of the debtors credit, assets and determine if there are records of assets owned that are not disclosed on the forms. Because property transfers almost always leave a paper trail, trustees can often find these transfers through a simple public records check. They must then determine if the borrower intentionally transferred property in anticipation of filing bankruptcy. The following questions are usually addressed by the trustee:
- Intent to defraud – the trustee is generally asked to determine whether the transfer was done with the intention to defraud creditors
- Sale price – in many cases, the trustee may raise a red flag because the sale price was significantly lower than the value of the property
- Time of sale – in some cases, debtors transfer property anticipating filing bankruptcy proceedings to avoid having to claim the property as an asset.
Lack of funding and auditing
Since Bankruptcy Trustees are part of the U.S. Trustee Program, they fall under the jurisdiction of the Department of Justice any cost cutting measures for the DOJ are likely to impact the trustees. The Bankruptcy Code was modified in 2005 in order to ensure the laws were not being used fraudulently. Debtors now must undergo means testing, counseling and meet certain criteria to be eligible for a bankruptcy filing. However, recent cost cutting measures within the Department of Justice has had an impact on the depth of audits of new bankruptcy filings, in fact, the current system for auditing has been suspended for an undetermined period of time.
Generally, audits are meant to protect consumers though some argue they protect only creditors. However, since nearly one-quarter of all bankruptcy filings contain potentially misrepresented data, it is likely that once debtors hear there will be no audits, this number may increase. Debtors should always make sure their bankruptcy filing is as accurate as possible and discuss any property transfers with their attorney.