|You are here: Information Center >> Credit, Debt Collection, Identity Theft and Fraudulent Transfers >> Legal Seizure of Assets|
Legal Seizure of Assets
Laws allow assets to be seized by creditors and courts for a variety of reasons. The IRS can seize and sell assets to satisfy unpaid taxes. A bankruptcy court typically orders assets sold to raise cash to pay creditors. Bank accounts can be seized or garnished for unpaid child support.
In these cases, there is a court order or judgment in place setting out an amount owed. Unlike the typical collection efforts where a credit card company, for example, attempts to get voluntarily paid through calls and correspondence, the court judgment gives the creditor the immediate right to collect (without the debtor’s cooperation) using any legal means.
Can a credit card company get a judgment against me?
Yes. Any person or business that claims you owe them money can, potentially, get a judgment against you. However, it is unlikely a credit card company will invest the time, expense and trouble to litigate the manner, although they certainly have that right.
TIP: Getting a judgment is not automatic or necessarily easy. The creditor must bring a lawsuit against you alleging that you owe a certain amount. At a trial of such a lawsuit, the creditor must prove the amount that you owe (through invoices, statements, contracts or notes you signed) and convince a judge or jury the money is, in fact, owed. Only then will a creditor be able to get a judgment against you.
Are any of my assets exempt?
Typically, assets are seized because a person has been sued, lost the case and a money judgment has been entered. For example, an individual may be sued and found at fault in an automobile accident case and the jury awards the plaintiff $100,000 in damages. The person who was sued now has a $100,000 judgment entered against him, which he is required to pay. He is known as the judgment debtor and the plaintiff becomes the judgment creditor.
Because most people do not have large sums of money available to pay judgments, laws allow assets to be seized and sold to satisfy or pay the judgment. However, each state has enacted laws protecting certain assets from seizure. These assets are exempt from being used to satisfy a judgment. For instance, real property where a residence is located is almost always protected to some extent under state homestead laws. These homestead laws vary from almost total protection of real property to little or no protection.
SIDEBAR: Florida and Texas provide the widest coverage of asset protection. In Texas, for example, up to 200 acres of land can be claimed under the state homestead exemption, no matter its value. Additionally, there are very few personal property assets that the typical person owns that can be seized to satisfy a judgment.
The easiest way to protect the largest number of assets is to reside in a state where laws offer wide protection.
TIP: Moving simply to avoid paying a judgment or creditors is usually considered a fraudulent transfer of assets. The court in the state where the judgment was entered will rule the assets still "reside" in the original state and order their seizure.
Are my bank accounts exempt from seizure?
Although cash in a bank account is normally available to a judgment creditor, the account can be titled in such a way that the money may be protected and exempt.
EXAMPLE: Putting a bank account in the name of a separate corporation, rather than the name of the individual owing money, may block a creditor from seizing the funds.
Married persons should not have joint accounts with both their names on them if one of them owes a money judgment. Retirement accounts are exempt from payment on judgments as well.
What real property is exempt from seizure?
A debtor’s personal residence is typically exempt from creditors. Debtors who do not own a home can sell assets and use the funds to buy a house, thus converting nonexempt assets into exempt assets, which are shielded from creditors. Likewise, selling a home can turn an exempt asset—the home—into seizable funds or assets. Generally, a person has 6 months to use funds from the sale of a home to buy another home. During that time period, the cash proceeds from the sale are exempt.
Can I transfer assets to avoid their seizure?
If an asset is not exempt, it can still be protected from a creditor by transferring the ownership from the judgment debtor. Transferring the ownership of assets is not illegal. However, the transfer cannot be done with the purpose of defrauding creditors.
EXAMPLE: Business owners routinely incorporate their business to protect its assets (such as the company truck) from the owner’s personal creditors.
SIDEBAR: Not only are fraudulent transfers illegal, in many cases the transfers are a criminal violation. A fraudulent transfer occurs whenever assets are transferred in an effort to obstruct a legitimate creditor from taking the asset.
TIP: An attorney who participates in a fraudulent transfer scheme can be regarded as a coconspirator in the fraud, and can be subject to the same penalties as his client
What is a homestead purchase?
Because many states have laws that protect their residents’ homes from judgments, bankruptcies and creditors, purchasing a home is one of the best and easiest ways to obtain a protected asset. Some laws protect the house from creditors regardless of its value, as well as a certain amount of land surrounding the home.
How does incorporation affect seizure of my assets?
A corporation is a legally formed company that is permitted to own assets (and owe debts). Corporations are owned by shareholders and run by officers. However, neither the shareholders nor the officers personally own the company’s assets. Therefore, if one of the shareholders owes child support, the corporate bank account cannot be garnished because she does not own the bank account.
Incorporating a business allows a person to place the ownership of assets in the corporation. Corporate assets become separate from personal assets and cannot be seized by the person’s creditors.
SIDEBAR: Laws look upon corporations as separate persons or entities from the owners or shareholders. Thus, the corporate assets belong to the corporation only, not the officers of the corporation. However, if the officers begin treating the corporate assets as if they personally owned them, laws allow creditors to seize company assets.
SIDEBAR: Incorporation is a legal means to protect assets unless the company was formed with the intent to avoid potential creditors who have threatened or brought litigation. Corporations that are set up as an extension of the owner’s personal transactions are not recognized by court. The "veil" that protects the corporation’s assets from the owner’s creditors will be "pierced" in those situations, and the creditors can seize the assets.
Can I avoid seizure through estate planning?
One of the best ways to protect assets is through estate planning. It is essential that estate planning be discussed with an attorney; otherwise, the assets may not be shielded. Any individual can set up a trust, make annual gifts to family members or place money in a retirement account.
What is a domestic asset trust?
A trust is an excellent way to protect assets. However, the trust cannot be managed or controlled in any way by the former owner of the assets. The trustee should not be a friend or family member. Debtors attempting to protect their assets by forming a trust are often unwilling to give complete control to a third-party trustee, in which case the assets will still be available to creditors.
What is a living trust?
During an individual’s lifetime, ownership of his assets can be placed into a revocable trust. At the time of death, the assets are not subject to probate as they are owned by the trust. However, a revocable trust is a poor asset protection technique. Because the debtor essentially controls the trust—he can revoke it at any time—the trust assets remain available to creditors.
The advantage to a living trust is the creditors will have more difficulty reaching the assets and might settle for less because of the expense and time it will take to break the trust.
What about a foreign trust?
Wealthy individuals often place assets in trusts that are located outside of the United States. The individual transfers ownership of her assets to a trust with foreign trustees who manage the trust property from the foreign country. A foreign trust has no trust offices or agents in the United States. These offshore foreign trusts provide a great deal of asset protection because compelling a foreign nation to enforce a U.S. judgment on behalf of creditors is extremely difficult, time-consuming and costly. Additionally, courts in the United States have no jurisdiction over foreign trustees and cannot order the trustee to turn over assets.
TIP: Countries with laws that protect foreign trusts include the Bahamas, Bermuda, the Turks and Caicos Islands and the Cayman Islands.
Caution: It may be nearly as difficult for your family to recover your money from a foreign trust as it would be for your creditors to do so.
What if I create a family limited partnership (FLP)?
A family limited partnership (FLP) is a limited partnership created to manage and control assets or property that is jointly owned among family members. The joint ownership of the assets is assigned or transferred to the FLP. The FLP then owns the assets, along with the right to manage and control them. Creditors are thus limited in their ability to recover assets to pay off judgments owed by one of the family members.
SIDEBAR: Typically, parents become general partners of the FLP with a very small interest—generally 1 percent. The remainder of the interest in the FLP belongs to the limited partners, usually the children. Parents have limited exposure and almost no risk of losing property to creditors under an FLP arrangement.
Is my retirement plan exempt from seizure?
Pensions, IRAs, 401(k)s and other retirement plans are usually exempt from creditors. Income that is deposited into these plans is protected from any attempts by a creditor to seize it. However, once the plan begins to pay out or distribute the retirement money, the funds are no longer protected. For example, the cash in a retirement plan is protected; however, once monthly payments begin and cash is transferred to the beneficiary’s bank account, it is subject to seizure by a creditor.
TIP: Funds in health savings accounts are generally exempt under state laws.
Does bankruptcy help me avoid seizure of my assets?
Filing a petition for bankruptcy stops any creditor from attempting to collect a debt from the individual or company that filed. Even creditors that have judgments cannot continue to attempt to seize assets. At the conclusion of the bankruptcy, the debts are discharged and no longer have to be paid. Thus, many assets can be protected by using a bankruptcy strategy.
What if I buy foreign assets?
Debtors can convert assets owned in the United States into foreign assets. For example, real estate can be sold here and used to purchase a home in France. A creditor would then have to begin a new suit in the foreign country or countries in order to collect on the assets.
TIP: Using this strategy as a way to avoid paying U.S. taxes is highly unadvisable.