The United States Trustee’s Office announced that it has suspended debtor audits. The 2005 Bankruptcy Code (BAPCPA– “Bankruptcy Abuse Prevention and Consumer Protection Act”) required the audits, which are performed by accounting firms under contract with the U.S. government. The suspension is solely due to budgetary constraints–the government is up to its eyeballs in debt and under sequester.
The auditing requirement hearkens back to the credit industry’s claim that there was widespread fraud among consumer bankruptcy debtors, despite there being no evidence to support that assertion.
The purpose of the auditing program was to uncover “material misstatements,” although the criteria for determining what inaccuracies meet this threshold has been kept from the public. It’s essentially the government’s own proprietary information. The stated purpose of the auditing program is to “gauge the magnitude of fraud, abuse, and error in the bankruptcy system” and to “enhance deterrence.”
Not my pet peeve, but a peeve nonetheless
Of all the things in the 2005 Bankruptcy Code I take issue with, the auditing requirement is way down on my list. Getting rid of the means test, for example, is more of a concern. Even the silly “credit counseling” requirement tops this one.
Still, the auditing requirement has always seemed a bit offensive to me. Auditing fits within the core argument for the 2005 act, which boils down to this: (1) debtors are, in significant numbers, abusing the system, and (2) there is a compelling reason to “reform” the bankruptcy system because this “abuse” harms the economy by driving up the price of credit. You may recall recall the “bankruptcy tax” argument made in support of the law. This lie lives on today with groups like the Financial Services Roundtable, which recently stated that “Funding for bankruptcy fraud prevention is critical because it keeps the cost of credit affordable for everyone.”
The problem with this argument is that there is no evidence that bankruptcy fraud has ever been widespread or that that small amount of fraud which did exist caused the cost of credit to increase. In fact, credit was cheap and plentiful prior to the passage of the law in 2005. It was plentiful because lending was profitable for the credit industry–especially Visa and MasterCard issuers.
The credit industrial complex, as I call it, makes this argument because bankruptcy itself hurts creditors’ profit margins. Less bankruptcy means more profit for creditors, which is why, after all, creditors exist. But the credit lobby can’t tell Congress to change bankruptcy law because creditors will make more money, so they come up with convenient lies like this. In turn, Congress takes the money, then tells the American public that the law will be good for them because it will make credit cheap and plentiful.
To the credit industrial complex, I say this: Get off the government dole! If you want the audits, then you pay for them. Oh, and one other thing: people in glass houses shouldn’t throw stones. You have plenty of your own fraud to worry about.
History also says otherwise
The 2005 law passed for one simple reason: creditors bought it. There was no push for the law among those lawyers and judges working in the system. In fact, bankruptcy lawyers and judges were ignored in the process. (One credit industry lobbyist went so far as proclaiming that bankruptcy judges were “part of the problem” and that they were “not real judges.”)
The problem with the premise that consumers are the problem is that history says otherwise. No widespread economic crisis has ever been caused by consumers; it’s been caused by large corporations (with a helping hand from Wall Street) and lack of government regulation (like lack of auditing!) of those “too-big-to-fail” institutions. This was true during the years prior to the onset of the Great Depression of the 1930s and, again, in the real estate collapse which began in 2007 and hit full stride at the end of 2008.
Joe Six Pack never brought us to the edge of financial Armageddon, Corporate America did. And to add to the irony, Corporate America bought our current anti-consumer bankruptcy system with the auditing requirement.
Let’s be clear. No one wants a system rife with “fraud, abuse, and error.” Courts can’t function effectively and will lose their authority if there’s no respect for the law. But the government has limited resources and, even if funding is restored, money could be spent in a more cost-effective manner. Audits can add costs and legal fees to those already experiencing financial hardship. The return on investment for money spent to audit consumers is skimpy at best.