Tag Archives: audit

U.S. Trustee Suspends Random Audits

Audit checklist, with tick against "audit satisfactory",On March 30, 2013, the Office of the U.S. Trustee announced that it would stop conducting random audits of bankruptcy cases.  The indefinite suspension is due to budget constraints.

Random Bankruptcy Audits

The Bankruptcy Code permits the U.S. Trustee’s office to randomly select  a certain number of Chapter 7 and Chapter 13 cases each year for audit.  The U.S. Trustee’s office could randomly audit up to one out of every 1,000 Chapter 7 or Chapter 13 cases filed, and at a minimum at least one out of 250 cases in each federal judicial district.

Bankruptcy law also allows the U.S. Trustee to audit cases with red flags — those with unusual income or expenditures.

The U.S. Trustee would identify the cases to be audited, and then send them to independent audit firms to conduct the audits. The firms were to look for material misstatements or other evidence of fraud. To learn more about these audits, see Nolo’s article What Is a Bankruptcy Audit?

What Now?

The vast majority of bankruptcy filers do not lie or commit fraud in their bankruptcy cases. For those that do, they are likely to be caught by the bankruptcy trustee assigned to their cases. The case trustees look for  red flags on the petition and schedules and will inquire or investigate further if anything looks fishy.

San Francisco Audit Reveals Broad Foreclosure Abuses

A report commissioned by the San Francisco county assessor-recorder uncovered widespread irregularities and legal violations in foreclosures that took place from 2009 to 2011. The report included audits of 382 foreclosures in the county. Of the foreclosures that were reviewed, 99% contained irregularities and 84% contained what the report called “clear violations of law.” The irregularities and violations included the following:

  • In 8% of the audited foreclosures, mortgage servicers failed to deliver to borrowers a notice of default at the start of the foreclosure process, as required by law.
  • In 85% of the foreclosures, documents replacing a trustee with a new trustee weren’t properly executed.
  • In 45% of the foreclosures, properties were sold at auction to entities falsely claiming to be beneficiaries of the deeds of trust.
  • In 6% of the foreclosures, the same deed of trust was assigned to two or more different parties.

California is one of the states that have been hardest hit by the foreclosure crisis. It is also one of the states that allow foreclosures to proceed outside of court without the supervision of a judge. The San Francisco audit is one of the first of its kind and is an indicator of how pervasive and widespread foreclosure irregularities may be in the rest of the U.S.

A copy of the report, “Foreclosure in California: A Crisis of Compliance,” can be found here.