Doing Asset Protection Before Creditors Come Calling
When it comes to asset protection, many of us wait until it’s too late to start making the plans we need to make. What are the benefits of starting asset protection strategies before there are creditors pursuing you?
What is Asset Protection and is it Legal?
Asset protection is the process of moving or transferring your assets into places that creditors cannot reach—generally, into places that federal or state law says that a creditor can’t touch in order to try to collect a judgment.
Asset protection is perfectly legal—it is not dishonest nor is it “hiding” anything from anyone. But when people get into trouble is when they start moving assets or money into different areas after a creditor is chasing them for money.
Timing is everything, and can be the difference between an honest asset protection strategy, as opposed to engaging in what is known as a fraudulent transfer.
A fraudulent transfer is a transfer of money or assets that is made to shield assets or money from a creditor, after the point where it is obvious that money is owed to a creditor. For a transfer to be considered fraudulent, the following must apply:
- The transfer must have been made to avoid paying a specific known creditor to whom money is owed
- The transfer must have been of funds or assets that, had the funds not been transferred, could have been taken by the creditor to satisfy the debt, and
- An intention must have existed by the debtor, to hide, shield, or protect the assets from that particular creditor
A claim is any right to payment—there doesn’t actually have to be a lawsuit filed, or a judgment entered against you, for a transfer of assets to be considered fraudulent. Because this definition is so vague, and can arise very easily, it is very important to do asset protection as soon as possible, before any such claim can arise.
Courts will assume that transfers of all of the debtor’s property, or sale of physical property for less than value, or sale of property to family or friends (“insiders”) is fraudulent, and done to avoid a judgment.
What if Asset Protection is Done Too Late?
If a transfer of assets is seen as fraudulent, with the intent to deceive creditors or avoid paying a debt or judgment, the transfer can be “undone”—that is, the creditor can still reach the assets that were transferred. The time between the transfer and when the claim was made against you, will be a major factor in determining whether your transfer of assets was legitimate or not.
Types of Asset Protection
There are many very legitimate and safe asset protection vehicles, such as putting money in certain investments, in certain kinds of property, or putting money in trusts. However these all depend on there not being a pending claim against you at the time these are set up or created.