Florida Asset Protection Law Blog | Attorney Jon Alper

A woman client  asked me the following question about homestead protection. Her husband purchased a homestead property prior to their marriage. The house was titled in the husband’s name. The husband was convicted of a white collar crime and sent to prison. The husband and wife had substantial joint debts, including some civil judgments, which the client  could not pay without the husband’s income. The client wanted to know if their creditors could put a lien on their house once the husband was incarcerated and no longer living in his homestead.

 

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Judgment debtors frequently maintain multiple bank accounts at particular banks. Some accounts may be in the debtor’s individual name and subject to the creditor’s writ of garnishment. Other accounts may be exempt joint accounts, wage accounts, or even accounts in the name of a separate, non-debtor  business entity for which the debtor has signature authority. Many of my clients find that their judgment creditors cause the bank to freeze all accounts at their bank including the exempt accounts and accounts of separate entities which are not involved in the lawsuit.

My clients ask me why did their creditor garnish a joint account which is obviously an exempt entireties account, or how could the creditor garnish the business account when the business does not owe the creditor any money. The answer is that the creditor served a writ of garnishment on the bank; the creditor did not serve a writ of garnishment on any particular account. The bank is the party which chose what accounts to freeze subject to resolution of the garnishment. Most banks will freeze any and all accounts which have the debtor’s name on the title or accounts for which the debtor has signature authority.

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Creditors cannot garnish wages of Florida debtors who qualify as head of household. That’s the general rule. I represented a Florida resident who lived with and supported a minor child. The client was in active military duty stationed outside of Florida. The judgment creditor served a writ of garnishment on the military. The debtor responded to the writ claiming the creditor could not garnish her pay because she was a Florida resident and head of household. The military responded that they were still required to hold her pay in response to the writ regardless of Florida’s garnishment exemptions. Here’s why.

The military states that the creditor procedure for military personnel is not a court ordered garnishment, but it is an administrative procedure called “involuntary allotment.” Involuntary allotment is used because military personnel reside all over the country and are constantly being relocated. Involuntary allotment is governed by 32 CFR Part 113. The procedure has no provision for garnishment exemptions based upon state law. Therefore, head of household exemptions do not protect against garnishment of military salary using the administrative procedure of involuntary allotments.

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A recent  Federal District Court opinion, if not appealed, suggests a significant asset protection planning opportunities through uses of Florida inter-vivos (“living”) trusts. To review, a judgment creditor may not attack a debtor’s beneficial interest in a trust where the trust has spendthrift provision. Spendthrift protection does not apply where the debtor established or funded the trust with his own assets for his own benefit (so-called “self settled trusts”). Self-settled trust does protect creditors in other states which have enacted statutory protections with domestic asset protection trust legislation, but Florida courts will apply Florida law to the debtor’s beneficial interest in trusts formed elsewhere.

The Florida District Court held that where a debtor sets up a trust, or contributes his own money to a trust, for the debtor’s benefit, the trust is not “self-settled” because the debtor is not the “settlor” to the extent another person has the power to revoke or withdraw the settlor’s  assets from the trust. The court cited the definition of settlor from Florida statutes and the Uniform Trust Code. The Court referenced comments made by the statute’s drafters which explained that a family member donating assets to a trust revocable by another family member should not be considered to be a settlor of the trust.


 

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Owning real estate or securities in a multi-member LLC has asset protection benefits by virtue of limited creditor remedies to attack your membership interest. What about owning personal automobiles, furniture, artwork, and other personal property in an LLC? Clients often suggest to me that they titled their household effects and cars in an LLC to keep the assets away from potential creditors.

 I usually do not recommend ownership of personal property in an LLC because I do not think it will be effective protection. The issue is a “reverse piercing” of the LLC. LLCs, corporations, and other legal entities used for personal consumption and personal needs can be considered an extension, or alter-ego, of the individual owner. Furniture, cars, and other property used personally on a daily basis should be considered as personal assets and not the property of a separate entity.

If a debtor uses an LLC for personal uses a court likely will consider the LLC assets the debtor’s personal assets and make the assets subject to execution; the creditor should not be restricted to a charging lien against LLC interests on an alter-ego LLC.

Insurance is another issue. Some property insurers will charge higher rates to insure assets owned in the name of a business entity.
 

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Florida statutes provide unlimited protection against wage garnishment when the debtor is head of household. This protection is very broad and effective, but some states have even better wage protection. Four states- North Carolina, South Carolina, Texas, and Pennsylvania- do not allow wage garnishment to enforce a commercial debt regardless of whether the debtor is head of household. I do not know if courts have carved out any exceptions from what appears to be an unqualified prohibition against wage garnishment in these four states. I do know that many Florida debtors, including most unmarried debtors and some business owners, are vulnerable to continuing wage garnishment up to 25% of their take-home pay.

Many of my clients consider moving to Florida because they believe we have the best debtor protection laws. Those people should thoroughly investigate the exemptions of their home states before deciding to flee to Florida. You may be better off to stay where you are. 
 

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Many prospective debtors are concerned that a court may impose an asset freeze as they try to avoid collection of a money judgment. An asset freeze substantially tips payment negotiation in favor of the creditor because the debtor can do nothing to protect himself without risking contempt of court sanctions.

In a recent federal district court proceeding a judgment debtor made a blatant fraudulent transfer of a property to a third party during a civil lawsuit for money damages. The creditor pointed out the fraudulent transfer in an amended complaint and asked the federal court to freeze the defendant’s other assets to prevent further fraudulent transfers and asset dissipation.

The district court judge denied the creditor’s application for a freeze order. The judge said that although a court has inherent equitable power to impose an asset freeze in advance of a judgment, the law requires “considerable evidence” of likely future asset dissipation. The judge concluded that a single transfer of a house to the debtor’s relative was not enough to demonstrate likely future asset transfers warranting a freeze. The court referred to a line of Supreme Court cases placing significant limits on injunctions against defendants in advance of a final judgment. This judge stated that asset freezes are appropriate in more egregious situations where the defendant has a history of creditor evasion.

In many other countries make it much easier for a civil plaintiff to freeze a defendant’s assets upon the filing of a civil lawsuit.  This case is Allstate Ins. Co.v. Baglioni, 2011 WL 5402487

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