Can a Creditor Freeze Your Assets Before Getting a Judgment Against You?

Posted on January 26, 2011 by Ken Laino

In the United States, a creditor usually has to obtain a court judgment against you before attempting to seize any of your assets. But there are some exceptions to this general rule.

In some cases, a court can issue a temporary restraining order (TRO) or an injunction against a debtor that effectively freezes the debtor’s assets. This frequently happens in divorce cases. Rule 65 of the Federal Rules of Civil Procedure provides rules governing injunctions and TRO’s. Most states have a similar rule.

In other countries, it is often easier for a creditor to freeze a debtor’s assets prior to obtaining a court judgment. In England and most other common law countries, courts are more likely to issue a pre-judgment asset freeze to prevent the defendant from transferring assets. This has become known as a Mareva injunction.  The name comes from an English case, Mareva Compania Naviera S.A. v. International Bulkcarriers S.A., 2 Lloyd's Rep. 509.

So no matter where your assets are, there are some instances in which those assets could be frozen before a judgment is obtained. The key point to remember from all of this?  Asset protection is most effective when done well in advance of any creditor issues.

Tags: ,

Trusts Designed for Probate Avoidance May Provide No Asset Protection

Posted on January 26, 2011 by Ken Laino

“Avoiding probate” has become almost an obsession with many Americans. In some states, this can be a good idea, to the extent reasonably possible. But “probate avoidance” is usually not my biggest concern for a client.

It is very important to remember that a trust designed to avoid probate may provide absolutely no asset protection. A so-called revocable grantor trust (a very common estate planning vehicle) often provides no protection from creditors. Put another way -- just because your assets are in some sort of trust, it does not mean they are necessarily protected from creditors. Only certain types of trusts will provide creditor protection.

Many trust arrangements do protect assets from creditors. Some states allow Domestic Asset Protection Trusts. Irrevocable life insurance trusts as well as trusts with an independent trustee will also generally provide protection from creditors.

This does not mean that a trust designed to avoid probate is a bad idea. In may circumstances it could be an excellent idea. I am simply emphasizing that I often run across people who think that the trust arrangement which they have is designed for asset protection, when it frequently is not.  Periodically reviewing your estate planning documents from an asset protection standpoint can provde to be very valuable.

Tags:

Lawsuit Lending

Posted on January 17, 2011 by Ken Laino

Believe it or not -- banks, hedge funds and private investors are now funding lawsuits.  They are pumping staggering amounts of money into medical malpractice claims, class actions against companies, and even divorce fights!  According to a front page New York Times article by Binyamin Appelbaum, total investments in lawsuits at any given time now exceed $1 billion!

As Mr. Appelbaum puts it, "Lawsuit lending is a child of the sub-prime revolution, the mainstream embrace of high risk lending at high interest rates..."  According to his article in The New York Times, Massachusetts in 1997 became the first state to allow lawsuit lending.  In 2000, the American Bar Association eliminated rules prohibiting the practice.

Some of those financing other people's lawsuits are private "investors", but even banks and financial institutions are getting into the act.  Another article in yesterday's New York Times emphasizes that lawsuit lending is currently subject to very few government regulations.

It seems to me that "lawsuit lending" needs far greater scrutiny by bar associations and governmental authorities.  There will be situations in which this practice might be appropriate, but there will be many more when it is not.

This much is very clear: lawsuit lending creates an even greater need for asset protection planning.  We already live in a highly litigious society.  Now, it seems some plaintiffs will be able to get third parties to fund their litigation.  This will not only facilitate the filing of more lawsuits, but it will also give plaintiffs resources to attempt to collect on judgments.

Tags: