Many businesses do not realize the unfortunate reality that debtors have tools to keep at least some of their assets protected from collections. Many debtors, especially high-profile companies and individuals with high net worth, often rely on an approach called asset protection to shelter their most valuable assets from creditors.
Understand the Asset Protection Plan
An asset protection plan is a strategy to give certain properties legal protection, usually by putting them in a trust, where those properties are legally protected from a creditor’s reach. The law generally permits a property owner to transfer property and deal with it as they see fit. However, if the property owner moves assets around after a claim for payment arises, the property owner could be subject to liability for a “fraudulent transfer”. California’s Uniform Voidable Transactions Act lets creditors avoid transfers of property by insolvent debtors in certain circumstances.
A fraudulent transfer is characterized by the debtor’s intent to hinder, delay, or defraud one or more creditors. It may also be characterized by transferring an asset without receiving “reasonably equivalent value in exchange.” Essentially, the debtor must have intended to hide property from creditors after learning the debtor would need to pay a debt. Courts may look at who the transfer was to, whether it was hidden, and whether the debtor transferred substantially all of the debtor’s assets to figure out whether someone had the intent to fraudulently transfer property. Some people transfer assets in an attempt to become “judgment proof” but this typically results in more legal action.
Because a fraudulent transfer is a serious offense, it pays to understand where assets are located. A debtor or potential debtor should be able to explain their asset protection plan. The more complicated the asset protection plan is, and the more convoluted steps and transactions it involves, the more likely a court could find wrongdoing.
Timing of Asset Protection
Fraudulent transfers often occur after a claim for payment. While some debtors are savvy and understand the importance of timing, some are not. Red flags are transfers made after you file your collections claim.
Personal Assets and Trusts
Business entities such as corporations, partnerships and LLCs are structures for commercial operations. If personal assets are placed in a business entity, the law allows a creditor to bypass the corporate structure of the business entity to seize those assets.
Bankruptcy Is Not Always an Option
Before 2005, bankruptcy was a viable option for debtors looking to discharge debts. Times have changed, in the creditor’s favor, and bankruptcy should no longer be relied upon as a “free pass” from a debt. Now, certain tools used by debtors in bankruptcy have been limited. Other parts of asset protection plans have become very difficult to protect in bankruptcy. In addition, bankruptcy judges have power to order debtors to produce evidence of assets – good news for commercial creditors.
Consider the Power of “Repatriation Orders” for Offshore Accounts
Many businesses put their assets into offshore accounts to take advantage of more favorable tax laws in other countries. But new case law weakens the untouchable nature of those accounts. Contrary to popular belief, a debtor can be compelled to bring their assets back to the United States under a “repatriation order”. A debtor who refuses can face a bench warrant and be held in contempt of court (and in jail) until the assets return, or until a court determines jail time is no longer “coercive.” Even if a debtor uses an offshore account, that account is not necessarily protected.
For more information on how to collect a past due debt, contact our experienced collections attorneys today.