Consumer Bankruptcy Audits

Bankruptcy insures consumers against unexpected wealth shocks, but this insurance can be abused; approximately 20% of filings contain material misstatements. Exploiting the conditionally random assignment of mandatory audits, I estimate their effect on debt forgiveness. Audits reduce debt forgiveness when alternative oversight is low (Chapter 7), but increase complexity, harming unsophisticated filers’ long-term financial health. Audits reallocate debt relief from misreporting filers and filers non-compliant with the audit to truthful filers. Reductions in debt forgiveness due to misstatements and deterrence exceed direct audit costs when oversight is low with deterrence effects being twice as large as reductions from detected misstatements.