Posted on September 7, 2010 by Jonathan Alper

This Is How Asset Protection Is Supposed To Work

Good asset protection works. I have had a client who was involved in complex and expensive civil litigation in Washington, D.C. with a former business partner. When I first met the client he was living and working in Virginia just outside D.C. although he had some business in Miami, Florida. He and his wife were in the process of getting a divorce. His litigation opponent was aggressive, well-funded, and unwilling to significantly lower his demands in settlement.

The client bought a home in Florida for $750,000 cash with stocks and money from a previous business sale. Even though he continued to commute to Virginia to run his business he obtained a Florida driver license and forwarded all his mail to his Florida house.  He and his wife agreed to remain married so that their joint bank account was protected from the creditor as a tenants by entireties asset. The client took half the money in the joint entireties account and bought an annuity. This was not a fraudulent conversion as the money was exempt in the joint account. He took some money in his own name and invested it in his brother’ s car wash business in exchange for a minority interest in the brother’s LLC. His remaining liquid cash was deposited in a small out of state bank.  

This asset protection plan was not air tight. The client’s status as a Florida resident could be challenged because he spent most of his time at his former Virginia location. His investment of money in his brother’s business could be challenged. Nevertheless, at the parties’ most recent mediation the client announced to the opposing attorney that he had purchase a home in Florida and moved to Florida. He claimed that he was living off money in his joint marital account. He did not claim he was “judgment proof” or that any judgment against him was “worthless.”

The opposing attorney did not react to the client’s pronouncement at the mediation. The next week the case settled for zero dollars. Both sides agreed to withdraw their competing claims and pay their own fees. This is how asset protection is supposed to work. The client’s asset protection plan was not perfect, but it was good enough to convince his opponent that the already expensive lawsuit would be followed, at best, by an expensive collection process of uncertain result. Asset protection cannot eliminate all potential problems such as fraudulent transfer issues or the potential for the rare involuntary bankruptcy, but it can substantially increase your negotiating power in civil litigation.
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Posted on April 5, 2010 by Jonathan Alper

Involuntary Bankruptcy: Is It A "Clear And Present Danger?"

 

Involuntary bankruptcy keeps asset protection clients awake at night. Involuntary bankruptcy is the one thing that debtors cannot plan for nor control, and it is the most powerful creditor weapon against an otherwise effective asset protection plan. Why? Because debtor’s protections in a Florida bankruptcy court are much weaker than they are in state court. For example, a Florida debtor can protect unlimited money in a Florida homestead, and full protection is afforded immediately upon purchase and occupancy. Under the new bankruptcy law, however, the purchase of a Florida homestead within two years prior to bankruptcy is reversible as a fraudulent conversion and protection is capped at $137,000 for 40 months after purchase.

So how real is the threat of involuntary bankruptcy against wealthy Florida debtors? Is involuntary bankruptcy a "clear and present danger," or does this threat sound worse than it really is.

I have never been involved in an involuntary bankruptcy proceeding because no such petition has ever been filed against any of my asset protection clients. Other attorneys I’ve spoken with report similar experience. I decided to investigate this question by asking people in the bankruptcy system who have a superior perspective. This past week I discussed involuntary bankruptcy with a law clerk for a bankruptcy court judge in Florida’s middle district and a Chapter 7 bankruptcy trustee. Both people were cooperative and interested in the question. The law clerk has been serving as a bankruptcy law clerk for the same bankruptcy judge for almost six years. The trustee has been a full-time Chapter 7 trustee in our district for 18 years. Here is what they had to say about involuntary bankruptcy.

The bankruptcy law clerk said that involuntary petitions are "very rare." He can recall "just a handful" during his six year tenure. Involuntary petitions which are filed, he said, are filed mostly against insolvent companies rather than people. The only ones this law clerk can recall specifically being filed against an individual debtor were filed against the main principals of companies themselves subject to an involuntary bankruptcy. The clerk cannot recall any involuntary bankruptcy petition being filed against an individual debtor for the purpose, or with the effect, of switching the debtors homestead and other exemptions to the less favorable bankruptcy law matrix.

The Chapter 7 trustee reported a similar experience with involuntary bankruptcy stating that these petitions are "very rare" against companies or individuals. The trustee can recall one or two involuntary bankruptcies in his 18 years on the trustee panel. None have been filed since 2005 when the new bankruptcy law went into effect, and none were designed to attack the debtor’s exemption planning.

I asked the law clerk why involuntary bankruptcy petitions were so unusual given that they can be a powerful weapon against some debtors. The law clerk explained that involuntary bankruptcy petitions are "very complicated." Most bankruptcy attorneys lack the knowledge and experience to file an involuntary petition, and the creditor has to find a very sophisticated bankruptcy firm. As a result, involuntary petitions are"risky and expensive." A bankruptcy court can deny a creditor’s petition for any number or reasons. If the creditor attorney makes even a small mistake the court probably will sanction the creditor/client.

What does this mean for asset protection planning? It means that the prospect of a creditor filing an involuntary petition to, for example, deprive a wealthy debtor of homestead protection, is an issue that should be mentioned, but it is not something that should control asset protection planning. Asset protection is never perfect or guaranteed; nothing is guaranteed in a courtroom. Most people can minimize the already unlikely prospect of involuntary bankruptcy by having at least twelve unsecured creditors (credit cards). An involuntary bankruptcy petition against a debtor with twelve or more unsecured creditors requires the joinder of three creditors.

　
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Posted on December 14, 2009 by Jonathan Alper

Involuntary Bankruptcy Is Like The Swine Flu

Client from Montana with the usual collection of real estate problems. He guaranteed a multi-million dollar loan on a failing real estate project, and the very unhappy partners were threatening legal action. I invited the man and his money down to Florida. We discussed the typical asset protection plan including a big and expensive homestead, joint accounts, and places to legally park money where its difficult for creditors to touch it.

At the end of the conversation the client asked me what would happen in the event his creditors sought an involuntary bankruptcy. I told him that an involuntary bankruptcy would be bad news because the bankruptcy court could set aside his homestead protection (homestead rules are different in bankruptcy court), and the trustee could force him to turn over other assets that would be protected, at least difficult to get, in a state court collection.

The client was somewhat upset that my asset protection suggestions could not protect him against all possible creditor outcomes, and particularly, he demanded that I give him a way to avoid the consequences of involuntary bankruptcy. I told him to buy time by fighting all civil lawsuits, but I could not protect his planning from a bankruptcy trustee.

In the end, I was able to convince this client that involuntary bankruptcy was highly unlikely with his particular fact situation. I explained that involuntary bankruptcy is like the swine flu. Remember that earlier this year people on TV were warning us about the millions of people who could die from the worldwide swine flu epidemic, and political commentators complained about vaccine shortages; and here we are during flu season, and the TV horror stories are gone. I saw another TV story where there is a surplus of swine flu vaccines- they can’t give the stuff away.

Involuntary bankruptcy is sort of like a bad dose of swine flu. If you catch it you may be very sick, but in reality, very few people are contracting a serious case of swine flu. Lots of debtors fear involuntary bankruptcy. However, in reality, there are few involuntary bankruptcy cases. Maybe there are more than there used to be, but the number is still a very small percentage of the large number of insolvent debtors in today’s economy. There are many reasons why involuntary bankruptcy is infrequent- these factors are  for another discussion. In asset protection planning, involuntary bankruptcy is one of those small risks you have to live with. There are ways to fight it, there are ways to minimize it, but no asset protection plan immunizes debtors against this disease. Get over it and do the best you can to protect against creditors.
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