Consumer Bankruptcy Audits
Fabian Nagel, Accounting PhD student
Consumer bankruptcy is the largest social insurance program in the US. Approximately 800,000 individuals file for bankruptcy every year. However, with large debt forgiveness also comes the opportunity for abuse of this generosity. Debtor audits – audits of consumer bankruptcy filings – were introduced to determine the truthfulness of bankruptcy filings. This project investigates the economic consequences of audits and material misstatements in bankruptcy filings. Audited individuals in Chapter 7 cases are less likely to have their debt forgiven. Material misstatements and noncompliance with the auditor lead to more frequent case dismissals, while a ‘clean sheet’ during the audit increases the likelihood of debt forgiveness. This project strives to merge individual bankruptcy records with credit bureau data to examine the longer-term consequences of audits and their findings for credit access, interest rates, and mobility.