Asset Protection is about taking
chips off the table when times are good. Asset protection is not
about cheating existing creditors. By the time that a person has
signed a personal guarantee that pledges all their assets for
some loan, or they have a serious accident, or they incur some
other significant liability that threatens to wipe out their
wealth, the time for asset protection has passed.
The real estate bust and economic downturn
have spurred an enormous interest in asset protection planning.
Unfortunately, for many people their interest in asset
protection is simply too late.
The primary problem is the existence of
fraudulent transfer laws that will nullify gifts and
transactions that are meant to put assets out of the reach of
creditors, and fraudulent conversion laws that limit a debtor's
attempts to put their money into exempt assets.
The Statute of Limitations for for
fraudulent transfers and conversions is usually around four
years, although each state will have its own variations. This
means that any transfer or conversion that was made within the
last four years might be targeted by a creditor to be set aside.
So, if you are in financial trouble now and just starting to
think about asset protection, you are probably too late. Way too
The fraudulent transfer and fraudulent
conversion laws do not look at lawsuits or judgments, but
instead look at when a "claim" arose. A "claim" is a
circumstance or event that could give rise to liability. So, if
you suspect that you might be sued for something, but you have
not yet been sued or even received a demand letter from the
plaintiff's attorney, you might still be too late to do asset
protection planning if the "claim" has already arisen.
Similarly, you may be DOA if you have
personal guarantees. Basically, a personal guarantee is your
pledge and commitment to back your obligations with the totality
of your non-exempt worldly assets. If you have a personal
guarantee and you attempt to protect your assets from the
guarantee, the courts will basically view it as an attempt to
take your chips off the table after you lost the hand, and will
not be sympathetic.
To be effective, asset protection should be
done before you get into financial trouble and especially before
you enter into any personal guarantees. After those things
occur, then you need other debtor planning or pre-bankruptcy
planning but not asset protection planning.
If you engage in asset protection planning
after a significant claim arises or after you have become
illiquid, then not only will any transfers that you make be at
risk of later being deemed to be fraudulent transfers and thus
set aside by the Court, but you also may risk a denial of
discharge if you later find yourself bankruptcy, voluntary or
involuntary. Post-claim asset protection can make your
situation worse -- a lot worse! Asset protection
planning is not a game, and there can be serious consequences if
you get it wrong after a claim has arisen.
One thing is certain if you are in trouble
or financially slipping, the more quickly that you speak with an
experienced creditor-debtor or bankruptcy attorney in your
state, the better off you will be. In addition to bankruptcy
counsel, some attorneys specialize in non-bankruptcy "workouts"
with creditors and "wind-downs" of distressed businesses.
But be very cautious about going to somebody who claims they can
help you with post-claim "asset protection" because the odds are
heavily against you and the stakes are high if the planner is
The lesson is that if you
want to engage in asset protection planning, you need to do so
before you have any problems. For if you wait until you
have problems, it will probably be too late. You can't wait
until you have the flu to get the flu shot, and you can't wait
until creditors are banging on the door to start asset
protection planning because then the odds of it working will be
Bankruptcy Opinion In Re Patel Illustrates Why Post-Liability
Planning Can Be A Very Bad Idea