What is a Bankruptcy Rule 2004 Exam?

court reporter
Like a deposition, rule 2004 exams are taken under oath before a court reporter. Getty Images

A Rule 2004 exam in a bankruptcy case is very much like a deposition in an lawsuit. Let’s see what a Rule 2004 exam is intended to accomplish and how it comes about.

The Schedules and the Meeting of Creditors

The filer in a bankruptcy case has to provide a lot of information to the court, the trustee and the creditors in the case. In the schedules and statements, the debtor (the person who filed bankruptcy) discloses debts, assets, income, expenses and details of financial transactions, especially those that occurred during the two years before the case is filed, and in some cases, information on transactions as old as six years.

 All this information can have a bearing on the course of the case.

In addition to the schedules, every person or entity that files a bankruptcy case is required by law to attend a proceeding called a meeting of creditors, also called a Section 341 meeting. Ironically, few creditors ever actually appear at the meeting of creditors. Instead, the Chapter 7 or Chapter 13 trustee uses that time to take the testimony of the debtor or a representative of the debtor in the case of a corporate filing. For more information on what happens at a meeting of creditors, see:

Chapter 7: What Happens at the Meeting of Creditors

Chapter 13: What Happens at the Meeting of Creditors

In the vast majority of cases, questioning at the meeting of creditors is short, to the point and elicits no unusual responses. It does little more than verify the information contained in the debtor’s papers filed with the court.

Some meetings are much more involved and can require hours of testimony, especially those for large scale corporate Chapter 11 reorganization cases. Sometimes it may be necessary to adjourn the meeting to another date for additional testimony or presentation of documents. Eventually, however, the meeting of creditors will be concluded.

The Rule 2004 Exam

As comprehensive as the schedules, statements and meeting of creditors are, sometimes they just don’t capture every piece of information the trustee or a creditor might need in determining a course of action. In fact, the debtor is obligated to cooperate with the trustee and the creditors throughout the case. Sometimes that additional questioning is informal, like when the trustee’s office calls the debtor’s attorney to ask for copies of a deed or a tax return. But sometimes, the questioning party wants something more formal. That’s where Bankruptcy Rule 2004 comes in.

Rule 2004 provides a process for examining virtually anybody who might have any knowledge of anything touching on the debtor's finances, property, schedules, plan of reorganization or ability to pay debts. Because of its broad scope, a Rule 2004 exam is often a fishing expedition with no real goal in mind other than to trip up the debtor or uncover evidence of abuse or financial mismanagement. For that reason, even filing a motion with the court requesting a 2004 exam can engender a fight and even a mini-examination by the court to determine the relevance of the information sought.

Who can ask for the Rule 2004 exam?

Rule 2004 states: “On motion of any party in interest, the court may order the examination of any entity.”

That’s quite a broad pronouncement. Any party in interest - anyone who has a legitimate  interest in the case - can file a motion asking the court to order any entity to submit to an examination. Parties in interest include the debtor, spouses, creditors of the debtor, owners, shareholders and bondholders, virtually anyone or any entity that is directly affected by the bankruptcy case.  

The scope of the Rule 2004 exam often hinges on the role of the person doing the examining. For instance, the trustee will usually be looking for information about the location and value of your assets, evidence of financial transactions, accuracy of your prior statements and the information you included in your schedules, and evidence of fraud.

Your creditors might use a Rule 2004 exam to seek out information on assets you did not include in your schedules or for evidence to support an adversary proceeding to determine that a debt is not dischargeable

Who can be examined in a Rule 2004 exam?

Likewise, as the rule states, the court can order examination of any entity, not limited to parties in interest. The entity to be examined can include anyone with access to knowledge about the debtor’s property or finances.

Right away you can tell that Rule 2004 reaches further than a meeting of creditors because it applies to any party who might have information relevant to the case. The exam could include an examination of bank officers, employees, officers or directors of the debtor, employers, spouses and ex-spouses, landlords, lawyers, accountants, beneficiaries, vendors, even relatives of the debtor -- virtually anyone with any information relevant to the debtor’s finances, subject to any privileges like attorney/client, spousal, and doctor/patient, all of which remain intact during an examination as they would during a deposition or a proceeding in court.

Furthermore, the court has the power to subpoena the person to be examined and to order that the person bring relevant documents. Like a proceeding in court or a deposition, the examination is done under oath and carried out in the presence of a court reporter. The information obtained during the examination can later be used in court just as a deposition could. 

How broad is the scope of a Rule 2004 exam?

The scope of Rule 2004 is almost as broad as the list of people who can be called. According to Rule 2004(b), the questioning  

may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate, or to the debtor's right to a discharge.

Even though the rule purports to limit the questioning, the subject matter of a Rule 2004 exam can touch on virtually anything that affects the debtor's finances or property, past and present.

In a case where a business may be continuing under Chapter 11, Chapter 12 or Chapter 13, the questioning can also relate to

the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan.

In truth, if the questioner can formulate a question that has some tangential relevance to the debtor’s past or current financial affairs or the debtor’s plans for the future, it’s fair game at a Rule 2004 exam.  

Rule 2004 exams are often used to question debtors about the disappearance of books, records and assets. Bankruptcy Section 727 provides that a debtor is granted a discharge unless certain acts have been commited or omitted. If an individual debtor has concealed assets, concealed or destroyed books and records, made a false oath, or failed to satisfactorily explain the loss of records or assets, the debtor can be denied a discharge. Consequently, some of the topics in a 2004 exam might include

  • Loan history
  • Checking, savings, CD, mutual fund or other accounts
  • 401k, IRA, pension or other retirement accounts
  • Insurance policies and annuities
  • Credit accounts
  • Employment history
  • Corporate, partnership, sole proprietorship history
  • Inventory and sales records
  • Purchase, sale and other transfers of property
  • Valuation of the assets or corporate stock
  • Tax history

In addition to being ordered to appear and answer questions, the examinee may be ordered to bring along any documents that relate to the topics to be discussed, including

  • Bank statements
  • Credit account statements
  • Salary, wage, commission, bonus history
  • Stock records
  • Retirement account records
  • Employment records
  • Titles, mortgages, financing statements and security agreements
  • Financial statements
  • Corporate documents
  • Letters, emails, phone records
  • Sales records
  • Inventory records
  • Bookkeeping and accounting records
  • Marketing materials, including websites, printed advertising, prospectuses, scripts