LOSING STRATEGIES

In succeeding chapters we will explain, among other things, how to "judgment-proof" your assets. In the process you will learn to avoid the losing strategies sometimes taken by debtors being pressed for payment.

* Badges of Fraud All 50 states have laws that guard against the practice of dodging judgments by transferring assets. Example: Dr. Smith gives his brother all his assets. He then tells his creditor that he is broke. This is generally referred to as a "fraudulent conveyance," or a "fraudulent transfer." It does not work! Any such transfer will result in the transferee (the brother) being treated as a trustee for the creditor of the transferor (Dr. Smith). A court will unzip the transfer, and the value of the asset will be available to satisfy the judgment. Among other things, any transfer that leaves a debtor poorer than before may be treated as a fraud on creditors.

* Misuse of a Corporate Transferee The use of a corporation to shield one from liability can be highly effective if properly done. It is, in fact, the main reason corporations exist in the first place. But simply transferring personal assets into a corporation you own will not protect you from a creditor who has a judgment against you personally, since the creditor can simply seize the corporate stock instead. Moreover, an improper transfer of assets into a corporation may incur substantial tax liability.

* The Thin Corporate Veil Even when a debt is not a personal debt, but is one incurred by a corporation you control, the corporate veil may not protect you. In many states, the corporate structure gives you no protection against certain types of torts. In many states, the corporate shield may be pierced, and the assets of directors or shareholders reached in satisfaction of its debts in the event of a failure to observe "corporate formalities." Such failures include, but are not limited to: 1) failing to properly capitalize the corporation; 2) forgetting to hold annual meetings; 3) letting franchise taxes go unpaid; 4) mingling corporate and individual funds; or 5) failing to file annual reports. Many small corporations operate in an informal way that would give creditors some basis for trying to pierce the corporate veil.

* Insurance that Doesn't Insure Most people never read their insurance policies. Insurance companies are in business to make money, and they do this by limiting their risk. Most insurance does not cover some of the largest risks you face, especially if you are in business for yourself. For example, if you are sued because of unlawful discharge of an employee, are you covered? Does your automobile coverage protect you when you drive your vehicle off road to a picnic site or campground? If you sell your business, and the buyer later accuses you of fraud, are you covered? One effective and inexpensive way to reduce some of these risks is to make sure that you buy a separate Umbrella Coverage policy that fills the holes left by your other insurance policies. Even then, however, many risks may not be covered. Moreover, with recent catastrophic losses in California, Florida, and Hawaii, the financial stability of the insurance industry is open to increasing question. After the S&L mess of the 1980's, are we absolutely sure that the insurance industry is financially sound?

TABLE OF CONTENTS 

 

INTRODUCTION:ASSET PROTECTION

FIRST SECTION: THE NEED FOR PROTECTION

SECOND SECTION: LOSING STRATEGIES

THIRD SECTION: THE SAFE PATH

 

 

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