What Is a Rule 2004 Examination in a Bankruptcy Case?

Creditor Looking at Financial Documents - Rule 2004 Examination

In most bankruptcy cases, if the trustee or a creditor has any questions or issues, they are resolved at the meeting of creditors. Occasionally, the trustee, a creditor, or another interested party will seek additional information relevant to the bankruptcy by filing a motion with the bankruptcy court for a Rule 2004 examination under the Federal Rules of Bankruptcy Procedure.

Most bankruptcy cases do not involve a Rule 2004 examination. If your petition and schedules are complete and thorough, it is unlikely that one will be requested. There is always a chance, though. If you're considering filing for bankruptcy, it is important to understand the nature of a Rule 2004 examination.

Basic Rule 2004 Provisions

The Federal Rules of Bankruptcy Procedure apply to all bankruptcy cases. Under Rule 2004, the bankruptcy court may allow an examination on motion of "any party in interest." Generally, the examination will be requested by the trustee, a creditor (and sometimes even the debtor), but any other person directly affected by the case may make a Rule 2004 motion. The request is filed after the meeting of creditors, when the person filing the motion needs additional information to resolve remaining questions or issues.

The provisions of Rule 2004 define the scope of the examination. It "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." In addition, in a Chapter 11, 12, or 13 case where a business may continue to operate, Rule 2004 provides that:

[T]he examination may 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.

The rule gives the court and attorneys the ability to issue subpoenas to compel attendance of any person at the examination. Anyone with knowledge relating to the debtor's finances can be subpoenaed.

Nature of a Rule 2004 Examination

A Rule 2004 examination is more formal than the meeting of creditors, but it is not a court hearing. The examination involves a detailed inquiry into matters relating to your bankruptcy.

The examination is conducted in the presence of a court reporter. Any person being examined is placed under oath. The proceeding is similar to a deposition in a civil lawsuit. The evidence has the same weight as a deposition and can later be used in court, either in an adversary proceeding or in different litigation.

A Rule 2004 examination provides an opportunity to scrutinize transactions and identify assets that may not be included on the bankruptcy schedules. Occasionally, a debtor may request a Rule 2004 examination to gather additional information about a potential challenge to discharge of a debt. More often, it is the trustee or a creditor who requests the examination.

A trustee may ask for an examination to try to discover evidence that would support an objection to discharge or another adversary proceeding in the bankruptcy case. The examination can be used to question the debtor about books, records, and assets that may have disappeared.

Rule 2004 examinations often are referred to — even by courts — as "fishing expeditions." While the rule purports to define the scope of the examination, in reality the scope is very broad.

The examination can cover a wide range of issues about your debts, financial condition, assets, or any matter that affects your right to a bankruptcy discharge. It also can cover your actions or conduct prior to filing the bankruptcy petition.

There are limits to how a Rule 2004 examination can be used. It cannot be used to harass or abuse a debtor. It also cannot be used to inquire into matters beyond the scope of the examination.

Courts have restricted use of Rule 2004 examinations when there is an adversary proceeding pending in the bankruptcy case or other litigation in another court. The primary reason for these restrictions is that Rule 2004 examinations do not provide the same discovery safeguards to those testifying that apply in adversary proceedings or other litigation. Witnesses generally are not entitled to be represented by legal counsel, and there are limitations on making objections to questions.

If a Rule 2004 motion is filed, the bankruptcy court will balance the trustee's duty to maximize the value of the bankruptcy estate with potential abuse of the Rule 2004 process. If the court finds that the moving party is attempting to harass the debtor or circumvent the Rules of Civil Procedure that apply in another proceeding, the Rule 2004 motion likely will not be granted.

Requests for Rule 2004 motions are most often encountered in bankruptcy cases involving a substantial amount of money, complex financial situations, or a business. Filing of a Rule 2004 motion may indicate that the trustee or a creditor suspects some kind of fraud by the debtor.

Who Can Be Subpoenaed in a Rule 2004 Examination?

Anyone with knowledge or documents relating to the debtor's finances, property, or assets, may be subpoenaed to appear and give testimony at the examination. The specific people will depend on the debtor's circumstances.

For example, the examination may include the debtor's accountant and bank representatives. If the debtor has a business, employees, vendors, and customers may be required to testify. Even the debtor's spouse and former spouse or other relatives may be called if they have information relevant to the inquiry. Subpoenaed individuals are directed to bring any relevant documents to the examination.

Avoiding or Complying With a Rule 2004 Examination

When you are represented by an attorney in your bankruptcy case, your attorney will try to avoid a Rule 2004 examination by resolving questions that the trustee and creditors may have, even after the meeting of creditors. In many cases, an experienced bankruptcy attorney will be able to resolve issues that might otherwise lead to an examination.

If you do need to undergo a Rule 2004 examination, your attorney will prepare you thoroughly in advance to make sure you know what to expect. You may be required to answers questions about your financial matters, assets, and records. You may be asked to bring additional information to the examination. If the purpose of the examination is to gather information from other people familiar with your finances, those individuals will answer questions and provide any documents they may have that are relevant.

Having a Rule 2004 examination in your bankruptcy case does not mean that you did anything wrong. You may still obtain your bankruptcy discharge. An examination occurs because the trustee or a creditor needs more information about your finances beyond the filing and schedules and information obtained in the meeting of creditors.

Talk With a Burr Ridge, Illinois Bankruptcy Attorney

Modestas Law Offices assists clients with Chapter 7 or Chapter 13 bankruptcy cases. In some situations, we also represent clients, including creditors, in bankruptcy adversary proceedings.

We serve Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends. Contact us to schedule your initial free consultation.

Categories: Bankruptcy Process

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