What Is a Bankruptcy Rule 2004 Exam?

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DEFINITION
A bankruptcy Rule 2004 exam is a deeper examination of a debtor's finances.

A bankruptcy Rule 2004 exam is a deeper examination of a debtor's finances.

During a bankruptcy proceeding, a trustee or a creditor might need to request a Rule 2004 exam to get some questions answered. Learn when this exam is used and what it is used for.

Definition and Example of a Bankruptcy Rule 2004 Exam

Bankruptcy Rule 2004 is a federal rule that states that "On motion of any party in interest, the court may order the examination of any entity." It's a relatively rare process, only used when concerns about problems or inconsistencies in a debtor's case are raised.

This rule exists for rare cases when the standard protocols for bankruptcy don't provide enough clarity for the trustee and the court to make their decisions. The Rule 2004 exam allows the trustee to make a deeper inquiry into the debtor's finances to clarify any issues or problems that aren't resolved. They can call a variety of witnesses to testify to conduct this examination.

Rule 2004 doesn't apply to bankruptcy cases involving a lawsuit, which proceed under different rules.

How a Bankruptcy Rule 2004 Exam Works

The filer in a bankruptcy case (the debtor) has to provide a large amount of information to the court, the court-appointed trustee, and the creditors in the case. This happens in the formal schedules and statements they file and in the meeting of creditors, also called a "Section 341 meeting."

In most cases, questioning at the meeting of creditors is short and to the point and elicits no unusual responses. It does little more than verify the information in the debtor’s papers filed with the court. However, some meetings are much more involved and can require hours of testimony, especially for large-scale corporate Chapter 11 reorganization cases.

As comprehensive as the schedules, statements, and meetings of creditors are, sometimes they don’t capture every piece of information a trustee or a creditor might need to determine a course of action. In a Rule 2004 exam, the trustee can examine virtually anyone who might have information regarding the debtor's finances, property, schedules, plan of reorganization, or ability to pay debts.

Rule 2004 reaches further than a meeting of creditors, because it applies to any party who might have information relevant to the case.

Furthermore, the court has the power to subpoena a 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.

Requirements for a Rule 2004 Exam

If a trustee, creditor, or any other party interested in the settlement requires more information, they can initiate an exam by calling for a motion with the court. If an exam is ordered, the scope of the examination allows for a broad sweep. 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.

Creditors might use a Rule 2004 exam to seek information about assets not listed or for evidence to support an adversary proceeding to determine that a debt is not dischargeable

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

If an interested party has a question with 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 often are 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 committed 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.

Key Takeaways

  • A bankruptcy Rule 2004 exam is a deeper investigation into a creditor's finances if there are concerns about anything in the case.
  • The trustee or any creditor can request a Rule 2004 exam for various reasons, including suspicious financial activity or signs of hidden assets.
  • The trustee can subpoena anyone with a connection to, or interest in, the debtor's finances for the investigation.

Article Sources

  1. U.S. Government Publishing Office. "United States Code, Title 11, Appendix-Bankruptcy Rules," Page 37.

  2. U.S. Bankruptcy Court Middle District of Florida. "Section 2004-1: Examination of Debtor and Others."

  3. U.S. Government Publishing Office. "United States Code, Title 11, Subchapter III, Section 341."

  4. U.S. Government Publishing Office. "United States Code, Title 11, Chapter 7." Page 206.