NEW YORK, NY -The United States Trustee's Office of the Department of Justice has rolled out a new program targeting chapter 7 and 13 debtors to random audits of their bankruptcy petitions, schedules and related tax and financial disclosures.

The audit program - which implements a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) - formally began on October 20, 2006, one year after most of BAPCPA's changes became effective.

Under the program, at least one out of every 250 chapter 7 and chapter 13 cases will be randomly chosen for audit. In addition, a case will be selected for audit if debtors' income or expenses significantly depart from the norms in the bankruptcy district where the case was filed.

The audits are intended to determine the accuracy, truthfulness and completeness of petitions, schedules and other information required to be provided in a bankruptcy case. Audits are to be conducted by a certified public accountant or independent licensed public accountant selected through competitive bidding. Debtors will be required to furnish the auditor with tax returns, account statements and verification of income.

As required under the bankruptcy law, the auditor will follow standards developed by the United States Trustee Program. These standards generally require the firm to gather sufficient evidence to complete the audit, explain any conclusions clearly, and maintain the confidentiality of debtors' information.

After reviewing debtors' information, the auditor will file a report with the bankruptcy court detailing any findings of material misstatements of income, expenditures or assets. If material misstatements are found, and cannot be satisfactorily explained by debtors, they may be subject to a civil enforcement action by the United States Trustee and/or criminal prosecution by the United States Attorney.

A civil enforcement action may also be brought against debtors failing to satisfactorily explain the refusal or inability to provide documents requested by the auditor. Debtors in such a case may also lose the opportunity to obtain a discharge.

Any questions concerning compliance with the new debtor audit program should be directed to any attorney familiar with the new bankruptcy code requirements and amendments.

Michael L. Moskowitz and Richard E. Weltman are members of Weltman & Moskowitz, LLP, having offices for the practice of law in New York and New Jersey. The firm handles cases involving bankruptcy and creditor's rights, business litigation, technology law, real estate, and other dispute resolution and transactional matters. They can be reached at 212.684.7800 or 201.794.7500 or by e-mail.