A bankruptcy Rule 2004 exam is a deeper examination of a debtor's finances. It's a relatively rare process, only used when there are concerns about problems or inconsistencies in a debtor's case.
Bankruptcy cases don't usually look much like other litigation. Only rarely will there be a lawsuit (called an adversary proceeding) connected with bankruptcy. Sometimes, however, a trustee or a creditor might need to schedule a Rule 2004 exam to get some questions answered.
What Is a Bankruptcy Rule 2004 Exam?
Bankruptcy Rule 2004 exists for those rare cases when the standard protocols for a 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 in order 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 lot 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 the vast majority of 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 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.
As comprehensive as the schedules, statements, and meeting 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 anybody who might have any knowledge of anything touching the debtor's finances, property, schedules, plan of reorganization, or ability to pay debts.
Requesting a Rule 2004 Exam
A trustee or creditor may request a 2004 exam for any of the following reason:
- The debtor transferred property out of their name before filing for bankruptcy.
- There are that the debtor is hiding assets.
- The debtor paid off creditors or racked up new debt before filing.
- Suspicious or large bank transactions exist.
Any party 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. Likewise, the court can order an examination of any entity with knowledge about the debtor’s property or finances.
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 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.
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 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 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 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.
- A bankruptcy Rule 2004 exam is a deeper investigation into a creditor's finances in the event that there are concerns about anything in the case.
- The trustee or any creditor can request a Rule 2004 exam for a variety of reasons, including suspicious financial activity or signs of hidden assets.
- The trustee can subpoena anyone with a connection or interest in the debtor's finances for the investigation.