The State Bar Client Security Fund (CSF) should change its procedures to ensure that any claimant owed a payout, who filed bankruptcy when the claimant knew or should have known that they were expecting a payment from the CSF, disclosed the expected payment in the claimant’s bankruptcy. Many claimants file bankruptcy and do not disclose expected payments from the CSF. The CSF lacks the funds to cover its expected payouts, and the CSF is insolvent because its liabilities exceed its assets.
Federal law states that a person who files bankruptcy and expects to receive a payment, must disclose the expected payment on their bankruptcy schedules. If the payee does not disclose this, the payee loses the right to the payment. A claimant who files a reimbursement claim with the Client Security Fund, and then files bankruptcy, before receiving the reimbursement check, would have to disclose the expected payment or lose it.
The CSF can check on http://www.pacer.gov to see if a claimant filed for bankruptcy after the claimant filed a claim for reimbursement from the CSF. Then, if the claimant has done this, the CSF would check the claimant’s bankruptcy schedules to ensure that the claimant listed the expected payment from the CSF on his or her bankruptcy schedules. If the claimant has not disclosed the payment, the CSF could refuse to pay the claimant. The CSF should check on pacer.gov a few days before sending the check.
The CSF’s present procedure fails to account for claimants who file bankruptcies more than 30 days after the CSF sends out a “Notice of Intent to Pay”. State Auditor’s Office reports show that the CSF will probably not be able to recoup any money the CSF pays to claimants, so the money is effectively lost to the CSF once a payout is made.
This procedural change would probably save the CSF hundreds of thousands, or millions, of dollars in payouts per year. The CSF desperately needs this money, as State Auditor reports show.