Confused about how bank trustee finds out about things and what they have access to

[Seren12]

Hi there, I have some confusions and was hoping someone could help me understand how this works.

So I'm in AZ and have heard that the bank trustee will likely look at 6 months of previous bank statements and also 2 years worth of tax info. At the same time though, I've heard that they can find transfers that have happened 1-2 years in the past. How is that even possible if they only look at 6 months of bank statements? Like how would they even know if you don't put it on your statement of financial affairs?

Another scenario - if you had a 401k withdrawal from let's say 1-2 years ago, that you didn't claim on your taxes and the IRS never caught it, would the bank trustee even know you got that withdrawal if you don't put it on the statement of financial affairs? Your tax documents wouldn't even show that income in this scenario since it wasn't reported and they don't look at bank statements that far back correct?

I have other random scenarios that pop into my head but these are a couple that just lead me to wonder how things actually work, how they find the nitty gritty details, how they dig to check things and how they bust people I suppose.

[justbroke]

Welcome to BkForum. Let me lay some groundwork first before answering your specific questions.

There's nothing special or magic. The Trustee may use various tools which show a lot more than a simple credit report. For example, LexisNexis has a lot of consumer data and behavioral data from many more sources than your typical credit bureau. They collect public data, certain banking data, and a bunch of other types of consumer information.

Whether or not a particular Chapter 7 Panel Trustee will go digging very deep is on a case-by-case basis. I say it's case-by-case because it is not worth it for the Chapter7 Panel Trustee to pursue things that aren't a winner (finds money or property). In a Chapter 7 case, the panel trustee only makes about $60 on a no-asset case. This may seem like that's fine given all the case, but Chapter 7 panel Trustees are just normal attorneys or CPAs. They do this to make money (commission) by finding and liquidating a bankruptcy estate. They lose money by spending too much time on cases where there is no money or property at all.

Some Chapter 7 panel Trustees are good at assessing how far to dig. Part of this digging is at the 341 Meeting where you are under oath. Your admissions and/or omissions can be used to cause the Trustee to give up (file a No Distribution report immediately), or to dig deeper. That's up to and including a more rigorous questioning under the Exam 2004 rule (it's like a deposition).

In the end, debtors need to be honest. The penalties for not being forthright include having all the debt marked as non-dischargeble forever. The worst case scenario is that the case it forwarded to the United States Attorney for prosecution of bankruptcy fraud (which is Federal, serious, and real jail time in a prison)... plus not being able to forever discharge that debt plus fines and penalties.

So I'm in AZ and have heard that the bank trustee will likely look at 6 months of previous bank statements and also 2 years worth of tax info. At the same time though, I've heard that they can find transfers that have happened 1-2 years in the past. How is that even possible if they only look at 6 months of bank statements? Like how would they even know if you don't put it on your statement of financial affairs?

The Trustee can go back as far as necessary to find if there are assets. How far back is a combination of both State and federal law.

Another scenario - if you had a 401k withdrawal from let's say 1-2 years ago, that you didn't claim on your taxes and the IRS never caught it, would the bank trustee even know you got that withdrawal if you don't put it on the statement of financial affairs? Your tax documents wouldn't even show that income in this scenario since it wasn't reported and they don't look at bank statements that far back correct?

You don't want to do this. You want the IRS to be up to date. Here's why. You can actually discharge old IRS debt that is older than 3 years, assessed more than 240 days prior, and for which a return was filed at least 2 years ago. That's a big deal. (Besides, you don't list 401(k) withdrawals on your Statement of Financial Affairs (SoFA). This is a tax issue and a serious tax issue when the IRS finally figures it out.

Besides, the IRS doesn't forget and if they catch up to you, all the penalties and interest will accrue until they catch you and until you have paid in full. That's the 10% plus your tax rate, plus the penalties and accruing interest.

I have other random scenarios that pop into my head but these are a couple that just lead me to wonder how things actually work, how they find the nitty gritty details, how they dig to check things and how they bust people I suppose.

The nitty gritty is to be honest. The bankrupt debtor has a chance to discharge hundreds of thousands, if not millions of dollars worth of debt. It's not worth to hinder, delay, or defraud creditors or the Trustee over mere dollars.

[Seren12]

Welcome to BkForum. Let me lay some groundwork first before answering your specific questions.

There's nothing special or magic. The Trustee may use various tools which show a lot more than a simple credit report. For example, LexisNexis has a lot of consumer data and behavioral data from many more sources than your typical credit bureau. They collect public data, certain banking data, and a bunch of other types of consumer information.

Whether or not a particular Chapter 7 Panel Trustee will go digging very deep is on a case-by-case basis. I say it's case-by-case because it is not worth it for the Chapter7 Panel Trustee to pursue things that aren't a winner (finds money or property). In a Chapter 7 case, the panel trustee only makes about $60 on a no-asset case. This may seem like that's fine given all the case, but Chapter 7 panel Trustees are just normal attorneys or CPAs. They do this to make money (commission) by finding and liquidating a bankruptcy estate. They lose money by spending too much time on cases where there is no money or property at all.

Some Chapter 7 panel Trustees are good at assessing how far to dig. Part of this digging is at the 341 Meeting where you are under oath. Your admissions and/or omissions can be used to cause the Trustee to give up (file a No Distribution report immediately), or to dig deeper. That's up to and including a more rigorous questioning under the Exam 2004 rule (it's like a deposition).

In the end, debtors need to be honest. The penalties for not being forthright include having all the debt marked as non-dischargeble forever. The worst case scenario is that the case it forwarded to the United States Attorney for prosecution of bankruptcy fraud (which is Federal, serious, and real jail time in a prison)... plus not being able to forever discharge that debt plus fines and penalties.



The Trustee can go back as far as necessary to find if there are assets. How far back is a combination of both State and federal law.

You don't want to do this. You want the IRS to be up to date. Here's why. You can actually discharge old IRS debt that is older than 3 years, assessed more than 240 days prior, and for which a return was filed at least 2 years ago. That's a big deal. (Besides, you don't list 401(k) withdrawals on your Statement of Financial Affairs (SoFA). This is a tax issue and a serious tax issue when the IRS finally figures it out.

Besides, the IRS doesn't forget and if they catch up to you, all the penalties and interest will accrue until they catch you and until you have paid in full. That's the 10% plus your tax rate, plus the penalties and accruing interest.

The nitty gritty is to be honest. The bankrupt debtor has a chance to discharge hundreds of thousands, if not millions of dollars worth of debt. It's not worth to hinder, delay, or defraud creditors or the Trustee over mere dollars.

That was very helpful thank you for the well thought out reply.

The first scenario doesn’t apply to me, was just curious. The second does, but it hasn’t been more than three years it was late 2018 I received the dispersal from 401k and did my taxes before getting the 1099-R. Then I got the 1099-R and just shrugged it off although it’s never sat well with me.

The current problem and fear for me is that I had planned to file my chapter 7 in three months, I pretty much have to file then but if I amend the 2018 return and it takes 12-14 weeks to fully be taken care of (according to IRS that is the time frame) then that would be a big payment to an entity right around the time I file and I thought it needs to be 90 days after any big payments before you can file? Or does it not matter if it’s to the IRS? I’m also scared shitless because it’s way more than I anticipated I would need to pay back to amend the return so any penalties on top of it not sure how I would pay.

Also, why wouldn’t the 401k dispersal need to be put on the statement of financial responsibility form? It does count as income to the IRS but not on that form where it asks for income from past two years?

[justbroke]

The current problem and fear for me is that I had planned to file my chapter 7 in three months, I pretty much have to file then but if I amend the 2018 return and it takes 12-14 weeks to fully be taken care of (according to IRS that is the time frame) then that would be a big payment to an entity right around the time I file and I thought it needs to be 90 days after any big payments before you can file? Or does it not matter if it’s to the IRS?

The IRS is a special type of "unsecured" creditor having something known as a "priority" status. It wouldn't matter if you paid the IRS the day before you filed as they are a priority creditor and it is not a "preference" to pay the IRS. It's mandatory to pay the IRS.

Also, why wouldn’t the 401k dispersal need to be put on the statement of financial responsibility form? It does count as income to the IRS but not on that form where it asks for income from past two years?

It's not income. It's actually already included in your income. The reason the IRS taxes it is due to the fact that no taxes were taken from that income. Disbursements from 401(k) plans are not included in "W-2" income because they have already been reported. The IRS is just plugging a loophole so that you can't funnel tax-exempt money into a 401(k) to only later remove it without paying any taxes on the regular income.

[shipo]

Seren12, keep in mind, that 401K distribution was in fact reported to the IRS by the financial institution administering the fund; sooner or later the IRS will connect the dots, and the longer they go before they do, the more you're going to have to pay. By far your best course of action is to file an amended return for 2018 and then work out a payment plan with them.

[flashoflight]

There are many clues available to the $60 trustee that doesn't require a lot of time. Let me give an example with bank statements.

There is a chapter 7 couple with no rent payments in bank statements but living in a single family home that they don't own. The trustee should find this suspicious and look at the property records to see who is the current owner and who were the previous owners. The trustee finds out the daughter is the owner and the former owner were the parents/filers. The trustee can compel the daughter to show proof that she has the income and did make the payments on the mortgage to prove this wasn't fraudulent conveyance.

[Seren12]

The IRS is a special type of "unsecured" creditor having something known as a "priority" status. It wouldn't matter if you paid the IRS the day before you filed as they are a priority creditor and it is not a "preference" to pay the IRS. It's mandatory to pay the IRS.


It's not income. It's actually already included in your income. The reason the IRS taxes it is due to the fact that no taxes were taken from that income. Disbursements from 401(k) plans are not included in "W-2" income because they have already been reported. The IRS is just plugging a loophole so that you can't funnel tax-exempt money into a 401(k) to only later remove it without paying any taxes on the regular income.

That was dumb, not sure how I spaced that fact regarding the 401k thanks for the clarification.

[bcohen]

I assume the money from this 401k withdrawal has already been spent? In that case, it isn't an asset, and the bankruptcy trustee could care less. He's not going to waste time and effort probing for something that doesn't exist anymore.

However, the IRS may at some point come after you for the back taxes/interest/penalties, possibly years from now. Do you feel lucky? If not, I suggest amending your 2018 taxes, and if it's more than you can afford, waiting to declare bankruptcy until this tax debt can be discharged.