Even if you have tried to build a life of predictability and safety, your financial life could collapse through no fault of your own. Is there anything that you can do? Though the best plan is to live within your means and pay your bills; sometimes events outside your control can put your whole financial life at risk. Consider the following ten things to help insulate yourself from catastrophe.
1. Know when NOT to make your assets harder to find. If you find yourself the subject of scrutiny concerning assets you may hold, the first thing you can do is to thwart some lawyer who is searching for assets. The first and easiest search to make on a prospective defendant is to go to the county Assessor where the prospect lives and see if he or she owns a house. In almost all counties, you can go to the county assessor’s website and search for a name of a property owner. To see how easy this is, go and do a search on yourself. So how do you change the name associated with your property on the county’s database? The most common way that someone does this is by quitclaiming the house to the prospective defendant’s wife or husband. The problem with this method is that Colorado has enacted a fraudulent transfer statute which gives a smart lawyer a way to force the house back into your name. If you have already received a threatening letter from a creditor you can be charged with a fraudulent transfer if you quitclaim the house.
2. Make your assets harder to find; build a good speed bump – If you create an intervivos or living trust, you can quitclaim your home and cars to the trust. You are under no obligation to use your own name for the trust. This is a recognized estate planning tool and doesn’t automatically trigger a mortgage holder’s due on sale clause. The problem is that the house is still your property and a smart lawyer can force you into transferring the house right back into your name if he finds the living trust. It is only a speed bump but it is an additional defense tool because it requires a more in-depth search to connect you with the property..
3. Make your assets harder to find; the best way. The way that some high-rolling real estate developers protect their assets is by creating irrevocable family trusts for the benefit of their children. You then transfer your home (and anything else you want to protect) into the trust. This is permanent however; you can’t take back out property in trust for your kids. I remember one high roller real estate developer a few years back who went bust. He still had a mansion and drove his kids around in a shiny new Mercedes. When a reporter approached him in the parking lot he said “What can I say, I have rich kids.” The downside to a transfer of this sort occurs if you have a mortgage on the house. This can trigger the due on sale clause found in most mortgages, if the bank is so inclined.
4. Make your cash assets harder to find by putting your bank account under a living trust. If you create an intervivos trust, you can then get an Employer Identification Number (EIN) from the IRS and then open a bank account under the trust. This provides a number of advantages, including the fact that the FDIC will multiply the insurance coverage on the account by the number of beneficiaries under the trust. For a family of four, this multiplication means a further protection of large amounts of money.
5. Cash is King. Far and away the most difficult target for a collection lawyer is the prospective defendant who uses cash as much as possible. Cash does make life more cumbersome; when you gas up at a gas station, you have to go into the building and prepay and you don’t get any frequent flier miles. The good thing is that there is no trace of the purchase back to you.
6. Make yourself harder to trace by buying and using prepaid credit cards. This is a modern variant of the Cash is King method listed above. There is nothing preventing you from buying a prepaid credit card and using it for purchases, and it even makes gassing up a little easier.
7. Incorporate yourself. It costs less than $100 to create a Limited Liability Company (“LLC”). In Colorado, the LLC is legally a separate entity from you. If the LLC gets sued you are not liable as long as you don’t obligate yourself personally for any debt. You can kill off the LLC if it gets into trouble. You can even create a corporation or LLC that then owns yet another corporation or LLC. This “company within a company” won’t create any further protections but does create complexity.
8. Change your name. Under our state’s laws concerning name changes, you must get a Colorado Bureau of Investigation credit check before a name change is granted. You can name yourself Donald Trump or John Smith if you want.
9. Offense is the best defense. In addition to some federal remedies, Colorado has enacted State remedies to defend against debt collectors. Under our Colorado statutes, you can bring suit against a debt collector in any court of competent jurisdiction. The debt collector has the burden of proof and must show that the collection efforts were not grossly negligent. You can even recover your attorney fees if the creditor is found liable for violating the collections statutes.
10. If the alleged debt isn’t in writing, it may not count. With real estate, a written document is mandatory. Every grant or assignment of an existing trust in lands, goods, or things in action must be in writing and signed by the party making it or his lawfully authorized agent. If the agreement is not in a proper writing, it is void. Even for unsecured credit agreements, the Colorado law has teeth. In spite of any statutory or case law to the contrary, no creditor may file or maintain an action or a claim relating to a credit agreement in excess of $25,000.00 unless the credit agreement is in writing and is signed by the party against whom enforcement is sought. In addition, any credit agreement that by its terms, is not to be performed within one year must be in writing and signed by the debtor.
If a debt collector has been able to blow past your defenses there is still one more option that you can use to stay afloat. Keep your assets by filing a Chapter 11 or 13 bankruptcy case. This way you may be able to “have your cake and eat it too.” If a bankruptcy reorganization or repayment plan is confirmed, you can make payments for 3-5 years and keep your assets while discharging unsecured debts. You may even be able to preserve your assets through a Chapter 7 liquidation if you can make full use of property exemptions. You shouldn’t do any of these Top Ten acts without consulting a lawyer.
Mike Robinson is Sr. Partner at Robinson & Henry P.C., a Castle Rock, CO Law Firm, ph. 303-688-0944. Mr. Robinson was assisted by Ryan Woods, an Associate with the Firm, in writing this article.