The bankruptcy trustee assigned to your case uses bankruptcy filings and supporting documents, including bank statements, to verify your reported information, among other things. For instance, the trustee might use the information to investigate unusual disclosures, find money for creditors, or identify fraud. Understanding what the trustee will look for can help determine whether filing for bankruptcy is in your best interest.
Understanding Bankruptcy
The bankruptcy process is designed to evaluate your finances and determine whether you have excess funds or property that could be used to pay creditors in exchange for your debt discharge.
People without funds to repay creditors typically file for Chapter 7 bankruptcy. Those with substantial disposable income make monthly payments to creditors for three to five years in Chapter 13 bankruptcy.
How the Bankruptcy Filing Process Works
When you file for bankruptcy, you might be surprised by how much data you’ll need to gather. You must be honest and forthcoming concerning your financial affairs and disclose all aspects of your financial situation on bankruptcy forms. You’ll also submit copies of your bank statements and other documents after you file.
Preparing Official Bankruptcy Forms
On forms called "schedules," you’ll list the amounts you owe creditors. You'll also disclose your income and expenses, value your assets, and list the law allowing you to "exempt" or keep the property. Filers also disclose previous asset transfers, such as a car sale or large gifts of property or cash.
Does the Trustee Review Your Bankruptcy Forms?
Yes. If you don’t try to ensure that your paperwork is correct and complete, or if you lie about the information you disclose, your bankruptcy case can get dismissed, and you might not receive a "discharge," the order that erases debt. The trustee can also refer your case to the FBI and the Justice Department for criminal prosecution.
Does the Trustee Check Your Bank Account?
Yes. You must provide copies of your bank account statements shortly after you file your case and before you appear for the 341 meeting of creditors. The trustee can audit your bank accounts anytime by requesting your books, records, and other documentation or taking your testimony to explain the origin of deposits and the reason for withdrawals.
If questions remain, the trustee can also request a formal audit of your books, records, and assets. However, it is rare for a trustee to keep such close tabs on bank account activity unless something appears suspect—for instance, if the figures in your account don’t match the figures on your schedules.
Protecting or "Exempting" Bank Balances Accurately
You must exempt the exact balance in your account on the day you file for bankruptcy. If you don't, you'll lose the funds. Here's how this common problem can play out.
After you file for bankruptcy, the trustee will likely ask you for a copy of your bank statement showing the exact amount in the account when you filed. The trustee will compare the amount exempted in the bankruptcy paperwork against your actual balance.
The trustee will not care whether you have outstanding checks or withdrawals that have not cleared the bank. If you exempted $100 in your bank account, but it was, in fact, $1,500 on the day you filed, you haven’t exempted $1,400 of it, which means the trustee will take that portion and use it to pay your creditors.
The simplest way to avoid this problem is to use the funds in your account for necessary items well before you file for bankruptcy. This approach ensures a low balance you can easily protect with bankruptcy exemptions.
The Trustee Will Verify Your Income
Not only will you disclose your income in several places on the bankruptcy forms, but you’ll also verify the figures with paycheck stubs and tax returns. You should also assume the trustee will compare those amounts to your bank statement deposit amounts.
If, for some reason, your deposits are significantly different than your claimed earnings, you’ll need to be prepared to explain why that is. The deposits could be innocent—legitimate sums you’re entitled to but haven’t “earned.” For instance, you received a bonus, borrowed money from your retirement account, or received your Social Security check.
Remember that while there are good reasons for such differences, additional funds received should be disclosed somewhere in your paperwork, and you'll have to protect the money with a bankruptcy exemption.
The Trustee Will Look for Suspicious Banking Activity
The trustee will also use bank statements to look for evidence of how much you spend on expenses and question you about any significant transactions. For instance, suppose you claim you spend $1,200 monthly on groceries, but your bank statements show $400 monthly. The trustee could claim you have $800 monthly to pay creditors through a Chapter 13 plan.
Similarly, if your bank statements show you paid a family member back for a personal loan, transferred a large sum to a friend right before you filed for bankruptcy, or sold your car, the trustee might have a duty to bring that money back into the bankruptcy estate for all creditors to share.
Filers should disclose such payments in the official bankruptcy form, Your Statement of Financial Affairs for Individuals Filing for Bankruptcy. However, the trustee will look for such activity because filers don't always do so.
Penalties for Bankruptcy Fraud
Before filing your bankruptcy, you will sign the bankruptcy paperwork several times under penalty of perjury. Placing your signature means that you are aware of the consequences you can face if you lie or intentionally omit something from your bankruptcy paperwork.
Everybody makes mistakes, and you won't suffer severe consequences if you didn't intend to defraud the bankruptcy court, as long as that’s clear. However, if the trustee believes you lied or intentionally omitted information in any way, you might face:
- an audit by an independent auditor,
- the dismissal of your case,
- the loss of your discharge (you can lose property that is nonexempt, hidden, undervalued, or fraudulently transferred but still end up with debts that have not been discharged),
- up to twenty years in federal prison,
- up to $250,000 in fines, and
- an order to pay criminal restitution (money to compensate for any damages caused).
You should consult with a bankruptcy attorney before filing your case if you’re concerned that you might face a fraud allegation or if you want to learn about avoiding fraud altogether. You can learn what to expect at your consultation by reading Bankruptcy: Preparing to Meet with a Lawyer.
