Asset Protection and Fraudulent Transfers: What’s the Difference?

Asset protection is smart. It allows you to put assets in places that creditors cannot reach or collect on. But there is a fine line between legitimate, legal asset protection, and a fraudulent transfer, and blurring that line can get you in some trouble—as well as expose your assets to creditors.

What is a Fraudulent Transfer?

A fraudulent transfer is any transfer that is done with the intent to deceive or defraud a creditor, or even just to delay collections. It is the classic example of “hiding assets.”

That’s not to say that the assets themselves actually have to be hidden somewhere. Any transfer of property or assets for less than market value can also be seen as a fraudulent transfer, especially if that transfer is to what is known as an insider—usually a family member, or close personal or business associate.

This avoids the unfortunately common tactic of selling all of your property to your relatives or friends for $1 to avoid that property from being taken by a creditor.

Fraudulent Conversions

You can also have a situation sometimes called a fraudulent conversion when property becomes a different kind of property, which is creditor exempt. So, for example, a debtor might take money in an otherwise collectable bank account and put it all into a creditor exempt retirement account.

It can even include liening property, which is often done to decrease the collectible equity in property.

Asset Protection

Asset protection is much different. Although it does evade creditors, it does not evade “a creditor,” meaning that at the time you do legitimate asset protection, there is no one debt or judgment or creditor. You face no imminent lawsuits or collections activities, and the property itself that is being protected still maintains its value (that is, it hasn’t been sold for pennies on the dollar).

That really means the difference between legal asset protection and fraudulent transfers boils down to timing—is there a current claim, collection action or judgment against you? If there is, then what might be a normal asset protection strategy can become a fraudulent transfer.

Undoing the Transfer

If a creditor suspects a transfer of being fraudulent, the creditor can try to undo the transaction, to reach the property. The creditor can even file a lawsuit against the person who acquired the property—in our example above, the creditor could sue your relative or friend, whomever it is that you “sold” your property to for $1, to get the property back. That means that your attempt to evade collection just brought someone (presumably close to you) into a lawsuit that they didn’t want or need.

Proving Intent

Those who do convey property and feel they have done so legally and legitimately, often must show the valid reasons for their transfer. If they can convince a court that their conversion or transfer of property was for a legitimate reason, and not to defraud or fool creditors, the court may not allow the creditor to collect on the property.

Think you’re owed money from a debtor? We can help you with your judgment, or finding assets to collect on that judgment. Call the West Palm Beach commercial litigation lawyers at Pike & Lustig today for help.

Sources:

flsenate.gov/laws/statutes/2016/726.106

casetext.com/statute/florida-statutes/title-xli-statute-of-frauds-fraudulent-transfers-and-general-assignments/chapter-726-fraudulent-transfers/section-726105-transfers-fraudulent-as-to-present-and-future-creditors/analysis?citingPage=1&sort=relevance