Asset Protection in Anticipation of Foreclosure
Around the beginning of 2008, a trend began that forms the basis for this article. I began receiving a lot of inquiries from people who all had the same problem. They were losing investment and/or rental real estate to foreclosure or short sale, and they knew the foreclosure would not pay off their entire loan balance. They fully expected a deficiency judgment to follow foreclosure. Many of these individuals, as investors and independent business people, owned much or all of their retirement outside a creditor-protected retirement plan (401(k), etc.) They were also worried about losing their home or other assets to creditors. Their question to me was always the same: they had been caught with their pants down and had no asset protection plan. Now they were in trouble. Could anything be done?
In normal times, it would be difficult to protect these people’s wealth. This is because of what’s known as fraudulent transfer law. Any transfer a person makes after a creditor threat arises may be suspected as a fraudulent transfer, i.e. an attempt to thwart creditors. If the creditor proves the transfer was done to hinder, delay, or defeat that creditor, the transfer would be undone by a court, so that the creditor could then seize the asset. Therefore, gifting your home to your brother a week before a creditor gets a judgment against you usually doesn’t work.
However, these are not normal times, and there is hope for people in the situation I’ve described above. I must emphasize that implementing an asset protection plan after creditor threats have arisen is by no means bulletproof. Unless you flee the country with your wealth, there is always a chance that even the best plan may fall apart. Fraudulent transfer law can be applied up to 4 years after a transfer has occurred (in a few states such as California, the law may be used up to 7 years after the transfer.)
But here’s the good news: a good asset protection planner knows how to make it more difficult for a creditor to prove assets were transferred in a fraudulent manner. If they can’t prove the debtor’s intent was to thwart a creditor, then they can’t use fraudulent transfer law to reach an asset that’s no longer owned by the debtor. That means a creditor, if he wishes to undo an asset protection plan, will have to use circumstantial evidence to convince a judge that the debtor did a transfer with fraudulent intent. Doing so takes time and effort. And, it’s going to cost the creditor a fair amount in legal fees.
In today’s environment, many creditors (especially banks) don’t have enough resources to chase all their debtors. In fact, if your creditor is a bank, then you can almost be certain (at the time of this writing, at least) that they are overwhelmed with collection cases. Their collection attorneys are overwhelmed due to the flood of foreclosures that have swept across the U.S. They are busy enough just with foreclosures. It may be a year or two, or even longer, before they get to collecting on deficiency judgments. Yes, our economy is that bad.
If you have a solid asset protection plan in place, and you have or expect to have a deficiency judgment against you, then you have transformed yourself from ‘low hanging fruit’ to a hard target. Your creditors will not be able to just grab your assets. They must first prove your plan is a fraudulent transfer. They will have to put 10 ‘easy’ cases on hold in order to commit sufficient resources to undoing your plan. And, especially if the plan is good, they may be uncertain as to whether they can undo your plan even if they try.
Because you are now a hard target, a variety of things may happen. The creditor could walk away from the judgment it has against you (the best case scenario), or it could try and settle the deficiency with you for an amount that is much smaller than it might otherwise have been. Either of these two scenarios are a ‘win’ for you and your asset protection plan. There is still the chance the creditor may try and pierce your plan. But place yourself in your creditor’s shoes: if you have to drop 10 collection cases to chase after a hard target, what would you do? Probably, you’d choose one of the first two scenarios. Still, for those who wish to eliminate or minimize the third scenario (which may still be a win if your plan holds up), my suggestion is to do asset protection planning before you get in trouble. That is the best way to do the strongest planning. With that said, a good asset protection plan, even if implemented after creditor threats materialize, is often much, much, better than doing nothing. And in my experience, with regards to the scenario I’ve outlined above, and in regards to our current economic environment, it will probably work (I’m sorry that I have to be so particular here, but I don’t want anyone to misconstrue what I’m saying as a green light to try and thwart all creditors in all circumstances!) There are, of course, situations where your creditor problems are too far along, too severe, and where engaging in planning would be a mistake. Often times a judgment call must be made on a case-by-case basis. If you have creditor problems, I will typically have an attorney look at your situation to see if asset protection is appropriate for you. If it is, I generally will implement a plan under attorney supervision. Among other things, this gives you the confidentiality of attorney/client privilege.
Which brings me to our next question: is it moral to set up an asset protection plan to dodge creditors? You’ll have to answer that question for yourself, but here’s how I see it: if, for example, you have $1 million in the bank and you have a $400,000 deficiency judgment against you, then I will not help you avoid that debt. You can pay the debt off and still be fine, and next time you’ll know not to be so aggressive with your investment activities.
But for those who are trying to keep from losing their retirement or their home, I’d like to quote Thomas Jefferson. He said:
“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”
Wow, that Jefferson was smart! He predicted, over 200 years ago, what banks would do to us. Actually, he had merely studied history, and had seen greedy bankers do this all before. Yes, bankers are more sophisticated now, but they are still up to their same old tricks.
And on a tangent note, here’s what Pres. Andrew Jackson said about bailouts:
“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.”
The foregoing is not a perfect fit for our times, but I’m sure you see how this quote remains relevant today. Our current government not only allows corrupt bankers to persist, it bails them out.
Stay safe and prosperous!