The Bankruptcy Act of 1978 created the United States Trustee Program (USTP) as a component of the Department of Justice (DOJ) and charged the USTP with the responsibility for supervising the administration of bankruptcy cases and trustees, including Chapter 7 panel trustees. Chapter 7 panel trustees are usually attorneys or accountants who are appointed by the USTP to administer bankruptcy cases filed under Chapter 7 of the U.S. Bankruptcy Code. Panel trustees are not government officials, but rather are private individuals appointed by the USTP to serve a 1-year renewable term.
As of June 2007, 1,140 Chapter 7 panel trustees operated nationwide and processed a total of 484,162 Chapter 7 filings during fiscal year (FY) 2007. Annually, Chapter 7 panel trustees are responsible for collecting over $2.7 billion in funds through the liquidation of debtors’ estates, and distributing those funds to secured and unsecured creditors in accordance with the U.S. Bankruptcy Code. Given the significant dollar amounts involved, the risks associated with the handling of cash and other liquid assets, and the inherently adversarial relationship between debtors and creditors, the integrity of the bankruptcy process is dependent upon the effectiveness of panel trustees.
The Department of Justice Office of the Inspector General (OIG) initiated this audit of the USTP’s oversight over panel trustees to determine whether mechanisms exist to ensure that bankruptcy assets are safeguarded and properly administered. Since FY 2004, the USTP has contracted with private audit firms to conduct this oversight work.11 In addition to the audits, the USTP has relied on other mechanisms to monitor panel trustees’ financial activity and case administration. We reviewed these various forms of oversight and discuss the results of our audit in the Findings and Recommendations Section of this report.
In addition, when we began our audit of the USTP’s oversight over Chapter 7 panel trustees we considered the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which at the time was a relatively new law that included new requirements for the USTP in the area of debtor oversight. Among those requirements were (1) the implementation and monitoring of a screening process known as means testing, for all debtors filing under the Chapter 7 and Chapter 13 Bankruptcy Code; and (2) the implementation and monitoring of a system of random and non-random debtor audits by independent certified public accountant (CPA) firms. Given the USTP’s oversight responsibilities, we also reviewed the USTP’s efforts in meeting the new requirements included in the BAPCPA.
The impetus for the USTP can be traced back to the Commission on the Bankruptcy Laws of the United States appointed by Congress in 1970 to evaluate and recommend changes in the substance and administration of the federal bankruptcy laws. The Commission found that case management under the prior Bankruptcy Act was inefficient, ineffective, and inconsistent. An independent study conducted by the Brookings Institution found similar problems with the system, especially with regard to the role of the bankruptcy trustee. This included the appearance of political patronage or cronyism in the appointment of trustees, inconsistency in the quality and ability of trustees, and actions by trustees that reflected their own economic interests above that of creditors. To address these problems, the Commission recommended the creation of an independent federal agency to provide oversight and promote integrity in the bankruptcy system.
The USTP is modeled after the organization for United States Attorneys, and consists of the Executive Office for United States Trustees (EOUST), which is led by a Director who oversees 21 United States Trustee Regions each headed by a United States Trustee (UST). Within the 21 regions are 95 field offices each headed by an Assistant United States Trustee (AUST). The Director acts under authority delegated by the Attorney General to provide day-to-day policy, legal direction, and coordination to the regional offices. USTs are DOJ employees appointed by the Attorney General and are responsible for supervising the administration of bankruptcy cases and panel trustees within their region.
The map below illustrates the 21 geographic regions of the USTP. The districts of Alabama and North Carolina are not part of the USTP, but rather have bankruptcy administrator offices in each of their judicial districts. We did not include the bankruptcy administrators in Alabama and North Carolina as part of our review.12
According to the USTP, its supervisory duties are an ongoing process that begins when a panel trustee is assigned to a case and continues throughout the administration of the case. According to the USTP Manual, the goal in monitoring panel trustees is to establish a system that allows USTs to evaluate a panel trustee’s competency and integrity in discharging his or her fiduciary duties.
The system established by the USTP consists of an oversight regimen that includes: (1) audits conducted by CPAs, (2) field examinations conducted by UST field office staff, (3) annual trustee interim reports, and (4) biennial trustee performance reviews.13
According to the USTP Manual on Chapter 7 Case Administration, CPA audits and UST field examinations are to be conducted on a rotating basis every 4 years. CPA audits are conducted by an independent CPA under contract with the EOUST and involve an on-site review of a panel trustee’s operations. As mentioned earlier in this report, prior to FY 2004 audits of Chapter 7 panel trustees were conducted by the OIG under a reimbursable agreement with the EOUST.
Field examinations are also conducted on-site and are performed by UST field staff. CPA audits and UST field examinations are similar in scope and methodology. However, field examinations are focused more on the trustee’s case administration, whereas CPA audits emphasize the trustee’s internal controls over bankruptcy assets. Both CPA audits and field examinations result in the issuance of reports and require a formal resolution process to document corrective action taken to remedy any deficiencies identified.
Each panel trustee is required to submit annually a trustee interim report to the regional AUST. The trustee interim report reflects the panel trustee’s activities and accomplishments during the reporting period such as the number of asset cases the Chapter 7 panel trustee is administering, the types of assets for each case and their dispositions, and a record of cash transactions (receipts and disbursements) for each case. Review of the trustee interim report is conducted at the regional UST office and includes: (1) an evaluation of the panel trustee’s completeness of reporting, (2) a summary of reported cases, (3) a case administration analysis, and (4) an evaluation of the accuracy of case and asset information reports. The trustee interim report review is not performed in years in which an audit or a field examination is conducted.
In addition, UST field staff conduct a trustee performance review biennially to document the panel trustee’s performance. The review includes an evaluation of the panel trustee’s performance in each of the trustee’s areas of responsibility. Like the trustee interim report reviews, the trustee performance reviews do not involve on-site visits but rather are performed at the regional UST field office and the results are communicated to the panel trustee.
Thus in any given year a panel trustee can expect one or more of the aforementioned reviews. The table below reflects a schedule of planned oversight activities for a panel trustee during an 8-year review cycle.14
TABLE 1: U.S. TRUSTEE PROGRAM
SCHEDULE OF OVERSIGHT ACTIVITIES
| Year of
| CPA Audit or UST Field
| Annual Trustee
Interim Report (TIR)
|Year 1||CPA Audit||None||None|
|Year 2||None||Performance Review||TIR Review|
|Year 3||None||None||TIR Review|
|Year 4||None||Performance Review||TIR Review|
|Year 5||UST Field Examination||None||None|
|Year 6||None||Performance Review||TIR Review|
|Year 7||None||None||TIR Review|
|Year 8||None||Performance Review||TIR Review|
|Year 9||CPA Audit||None||None|
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was enacted on April 20, 2005, with most of the law’s provisions taking effect 6 months later on October 17, 2005. The BAPCPA created several additional responsibilities for the USTP, including the implementation and monitoring of: (1) means testing, (2) debtor audits, and (3) credit counseling.
Means Testing. The BAPCPA created a means test requirement for all debtors filing for protection under Chapters 7 and 13 of the Bankruptcy Code and required that the USTP perform means tests on all debtor filings.16 The purpose of the means test is to prevent debtors who have the ability to repay their creditors from being discharged from their debts under protection of the Bankruptcy Code. The means test involves the review of the form entitled “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation” (Official Form 22A), as well as the debtor’s bankruptcy petition and supporting schedules.17 If filing under Chapter 7 and repayment is deemed possible, the debtor’s case may be dismissed or the debtor may voluntarily convert to Chapter 13 of the Bankruptcy Code that requires individuals to repay a portion of their debt under a payment plan or face dismissal of their case altogether.
Debtor Audits. The BAPCPA mandated that the USTP establish a system of audits to determine the accuracy of information provided by individuals filing for bankruptcy under Chapters 7 or 13 of the Bankruptcy Code. The BAPCPA provides that audits will be performed by independent CPAs or independent licensed public accountants. It further states that the cases will be selected for audit on a random basis as well as a non-random basis if income or expenses deviate significantly from the norm of the district in which the case was filed.
Credit Counseling. The BAPCPA requires that individuals receive credit counseling before filing for bankruptcy and that they take a debtor education course before having debts discharged. The BAPCPA assigned responsibility to USTP for implementing these requirements, including the certification of approved credit counseling and debtor education programs.
As part of this audit, we reviewed the USTP’s efforts in meeting the BAPCPA’s means testing and debtor audit requirements. We did not test for compliance with credit counseling requirements because this issue was reviewed by the Government Accountability Office (GAO) in a May 2007 report, which is discussed under “Prior Audits.”
The GAO and the OIG conducted prior audits that have examined various aspects of the USTP and bankruptcy reform efforts. Below is a summary of two of those reports.
In its report on bankruptcy reform, the GAO reviewed the implementation of the credit counseling requirement under BAPCPA and concluded that it had been implemented as required.18 However, the GAO found that because there is no mechanism in place to track the outcome of credit counseling sessions, it is not possible to determine the benefit of such counseling, if any, to debtors.
In our March 2003 audit report, we reviewed the management controls implemented by U.S. Trustee offices to identify and eliminate fraud and misconduct by debtors, panel trustees, and others.19 We found that the management controls in place were primarily focused on panel trustees and their employees and not on the debtors. We also found that when it came to debtor fraud the USTP relied too much on tips from third parties and panel trustee reviews of case information.
The objectives of this audit were to determine if the USTP is providing adequate monitoring and oversight of Chapter 7 panel trustees and to assess the USTP’s compliance with requirements of the BAPCPA, such as its implementation of the means test and debtor audits.
We conducted our audit work at EOUST headquarters in Washington, D.C., where we interviewed officials involved with panel trustee and debtor oversight; reviewed pertinent policies and procedures; and analyzed reports, memoranda, and other documents related to the oversight process. We also reviewed the process of awarding CPA contracts for both panel trustee and debtor audits, and examined the most recent contracts that were awarded with a specific emphasis on the statements of work. Finally, we performed a comparative analysis of the CPA audit reports with previous Chapter 7 audits issued by the OIG.
In addition to our work at EOUST headquarters, we conducted site work at regional offices in Cleveland, Ohio; Los Angeles, California; San Francisco, California; and Seattle, Washington. All 4 regions were among the top 10 regions for Chapter 7 bankruptcy filings in FY 2006, including Cleveland, which had the most filings in the nation. At the regions, we conducted interviews with the U.S. Trustees, Assistant U.S. Trustees, bankruptcy analysts and attorneys, and other field staff. We also examined audits and field examinations of panel trustee operations and reviewed files to determine whether adequate follow-up was performed to document corrective action taken on deficiencies identified in audits and field examinations. In addition, we examined files to determine whether the required panel trustee interim report reviews were performed. With regard to debtor oversight, we examined debtor audits that included material misstatements in order to determine whether appropriate follow-up procedures were followed. We also assessed the means testing process for debtor bankruptcy filings to determine whether means testing was being performed in accordance with the BAPCPA.
Appendix I contains further description of our audit objectives, scope and methodology.
From FYs 1990 to 2003, the OIG helped provide this oversight by auditing individual Chapter 7 panel trustees through a reimbursable agreement with the EOUST. During that time the OIG issued over 4,000 audit reports on individual Chapter 7 panel trustee operations.
Congress established the bankruptcy administrator program as part of the United States Courts system in 1986 to oversee the administration of bankruptcy cases, maintain a panel of private trustees, and monitor the transactions and conduct of parties in bankruptcy in Alabama and North Carolina.
Other reports submitted by the panel trustee include the Trustee Final Report, which summarizes all actions taken by the trustee to administer a case, and the Trustee Distribution Report, which certifies to the USTP that all funds have been disbursed and the case has been fully administered.
Under Chapter 13, debtors file a repayment plan with the court under which they agree to pay their debts over a period of usually 3 to 5 years. In these cases debtors obtain discharges from their debt upon completion of the repayment plan.
Supporting schedules are as follows: Schedule A (real property), Schedule B (personal property), Schedule D (creditors holding secured claims), Schedule E (creditors holding unsecured priority claims), Schedule F (creditors holding unsecured non-priority claims), Schedule H (co-debtor), Schedule I (current income of individual debtors), and Schedule J (current expenditures of individual debtor’s statement of financial affairs).