Here are four ways to avoid paying a judgment: 1) Use asset protection tools such as an asset protection trust, 2) use legal exemptions, 3) negotiate with the creditor, 4) file for bankruptcy. So, which is better? Which ones will leave you licking your wounds? Read on to find out.
What Is a Judgment?
A judgment is a decision a court makes. It is detailed in a court order. As such, the court order spells out the resolution to a dispute between two parties. It determines each party’s rights and obligations. In addition, a judgment often requires financial compensation or movement of property from one party to another. The one who owes the money is the debtor. The one owed compensation is the creditor.
The creditor can pursue available assets in any state. Plus, many foreign countries also enforce US judgments. Moreover, it allows the creditor to collect post-judgment interest on any unpaid balance.
Now, here is something to know. A judgment does not generally force the debtor to start taking action to pay the creditor. The creditor is the one who needs to act under state law to seize the debtor’s assets. Failure to pay a judgment is not subject to contempt of court or imprisonment. In other words, there is no “debtor’s prison” under US law. There may be some exceptions in the case of child or spousal support.
Avoid Paying a Judgment
So, how do you avoid paying a judgment? The best approach is to understand what methods a creditor has under state law to rip your assets away from you. Once you know this, then you can set up an asset protection plan to render those methods useless.
Setting up an asset protection plan can help you avoid paying creditors who have civil judgment against you. Asset protection means holding your assets in ways that make it a formidable and costly challenge for a creditor to seize your assets to collect a judgment.
Are You Concerned About a Judgment?
Find out which tools are best to protect your assets from lawsuits, creditors, and judgments. Call or fill out a free consultation form on our website. We help people across the country by phone, Zoom or other electronic method of choice.
Is Not Paying a Judgment Immoral?
Keep in mind your opponent used a legal procedure to try to get your money. You are simply using a legal procedure to keep him or her from doing so. You’re not breaking out a shotgun and settling the score at the O.K. Corral.
Judges are just human beings. How many five to four decisions do we see in the US Supreme Court. In many cases, a judge who ruled one way could have just as easily ruled another.
For those naysayers out there, what if this was your money we were talking about here? What if the plaintiff got up on the witness stand and lied until he or she was blue in the face? What if the judge believed the lies? Are you going to feel all warm and fuzzy about emptying your bank account for the benefit of a deceitful fabricator? Of course not. See our video entitled Is Asset Protection Immoral where we discuss this issue in detail.
Four Methods to Avoid Paying a Judgment
1. Asset Protection Tools
Two of the most common legal tools to help you not pay a judgment are 1) an asset protection trust and 2) an LLC.
Asset Protection Trust
Many assets are vulnerable to seizure under various state laws. So, there are some powerful tools you can use to protect those assets. The strongest asset protection structure is the asset protection trust. US courts have jurisdiction over domestic trusts. So, we have not seen US trusts work very well. The most effective asset protection trust uses protective laws not available in the US.
Thus, an offshore asset protection trust has proven most effective to help you avoid paying a judgment. For example, our organization has set up more asset protection trusts in the Cook Islands than any such company in the world. Cook Islands is part of New Zealand and is located due south of Hawaii. Our law firm / trustee manages your trust. We typically place an LLC inside of the trust. You’re the initial LLC manager and signatory on the bank account. When the “bad thing” happens that can seize your assets, our law firm / trustee can step in as LLC manager to protect you. US courts do not have jurisdiction over our foreign law firm. Thus, this method has protected our client’s assets in every case in which we have employed it.
LLC
The owner of an LLC is a member. In most states, the exclusive remedy of a judgement creditor against a debtor’s membership interest in an LLC is limited. The creditor can only get a charging order lien against that member’s interest in the LLC. What a charging lien does is put a lien on the profits distributed from the company to the debtor.
However, if the LLC decides not to make distributions, the creditor gets nothing. Now, the one who holds the charging order has a right to the distributions. However, since they have the right to them, Revenue Ruling 77-137 states that the creditor needs to pay taxes on the profits, distributed or not. (There have been some alternate court decisions on this lately.) So, under this ruling, the creditor not only gets nothing, but they also get a tax bill.
In most states the LLC must have more than one member to enjoy the charging order protection. That is, it must be a multi-member LLC. However, the membership interest doesn’t need to be equitable. For instance, a judgment debtor may have a 90% interest in the LLC. The other LLC member might have a 10% interest. This arrangement is a multi-member LLC that can enjoy the charging order protection.
Don’t Just Rely on LLCs to Avoid Paying a Judgment
Now, here is a major caution. Whereas, an LLC can offer asset protection, we would not rely on it alone. Ask just about any attorney. There are many results-oriented judges out there who rule based on their own desired conclusions. For example, we had an associate where the judge ignored the LLC in a divorce case. Plus, the judge gave the wife 100% of all assets, including the house, the LLC, the bank accounts; everything. The law says 50/50 and to respect the charging order. But the judge ruled contrary to the law.
So, that is why the offshore asset protection trust stands above domestic asset protection structures, including LLCs. The offshore asset protection trust is simply more effective. That is because it puts your assets beyond the reach of your local courts.
2. Legal Exemptions
Now, the legal exemptions vary by state. Knowing which assets are exempt and which need protection is important in determining the proper asset protection plan for you.
Some examples of legal or statutory exemptions include the homestead exemption. This is where state law may protect a certain portion of your home from judgment creditors. In addition, the law protects many retirement accounts. Likewise, some states offer tenancy by entirety protection. A few states protect the wages of the debtor, but most don’t. Finally, the law may also protect social security income.
Homestead Exemption
In Florida and Texas, for example you might be able to protect 100% of your primary residence from judgment creditors. However, Pennsylvania and New Jersey protect no home equity whatsoever. To enjoy homestead protection, you must live in the house and show intent to make it your permanent primary residence.
Even in states such as Florida, there are limitations. If you file for or are forced into bankruptcy, you must have lived in Florida for 40 months before you get to enjoy the homestead exemption. So, in such cases, suddenly moving to Florida and buying a house may not help you avoid paying a judgment. Plus, if inside of the city limits, property must not be over half an acre. If in an unincorporated area of a county, there is a 160-acre limit.
In most states, some or all your home equity is vulnerable. So, we have real estate asset protection strategies that we can employ to protect home equity. Call or fill out a free consultation form for details.
Retirement Accounts
Federal law generally protects accounts formed under Employee Retirement Income Security Act (ERISA). Most states offer some protection for retirements account one forms under IRC 401(a), 401(k), 403(a), 403(b), 408, 408A, 409, 414, 457(b), and 501(a). This includes IRAs.
However, many states only protect traditional IRAs. In states, such as California and Georgia, ROTH IRAs are fair game for a creditor. Some states have strict limitations as to how much one can protect. The maximum IRA protection in Pennsylvania, for example, is $15,000. Plus, in California, if a judge thinks you can support yourself another way during retirement, the creditor can seize your entire IRA.
There is hope. We have an asset protection trust that can protect retirement accounts regardless of the state where you live.
Tenants by Entireties
About half of US states offer the tenancy the entireties (T by E) form of ownership. This is only available to married couples. Such ownership exempts such assets from the debts of only one spouse.
Here are the problems. First, if an attorney can convince a judge that your TBE was structured as a sham to defraud creditors, the judge’s whim may carry more weight than your counsel’s interpretation of the statutes.
Plus, what if your spouse dies or wakes up one day and reveals he or she has decided to leave the relationship? What if your spouse suddenly dies? Upon death or divorce, T by E protection automatically goes out the window. One man we know got two visitors on the same day. One was the police telling him his wife had died in a tragic accident. The next was an attorney ordering the seizure of his former T by E assets.
Wages
This exemption is very limited. Only four states do not allow wage garnishment: North Carolina, Pennsylvania, South Carolina, and Texas. Most other states allow garnishment of 25% of one’s wages.
Passive income, such as rental income and LLC distributions are not exempt. In Florida, the head of household wages are exempt if the weekly disposable income is $750 or less.
Social Security
Federal statutes protect social security income (SSI). So, a creditor cannot garnish social security before it goes into your bank account.
Once the SSI hits your bank account, it is still protected if one can clearly identify and trace it back as social security funds. Some judges have narrowed the exemption down to the amount reasonably needed to support the debtor.
3. Negotiate with the Creditor
The harder you make it to collect from you, the easier it is to negotiate a lower settlement. Lawyers love low-hanging fruit. So, that’s why putting your bank account, home and investment property in your own name is usually not a good idea.
So, you need to make it not worth your creditor’s time and money to collect from you. If you have a big fat bank account in your own name, forget it. Conversely, when you put your money into an offshore asset protection trust in a good, safe international bank, you have leverage.
Most lawyers and their clients prefer to have an easy payoff than risk getting left with nothing. That’s why it’s important to set up and employ an asset protection plan early in the game.
4. File for Bankruptcy
Let’s say this up front. Bankruptcy is almost always a mistake for someone who has significant assets. It is a knee-jerk reaction based on panic and fear. Don’t expect the bankruptcy attorney looking for a payday to tell you this, but there are usually better ways. One better way is to set up the proper asset protection tools and live an asset protection lifestyle.
Why? A Chapter 7 bankruptcy strips you bare of all your non-exempt assets up to the amount of the judgment. So, the judgment debtor must hand over all vulnerable assets to the bankruptcy trustee. The trustee gets a chunk of all assets he tears away from you. Plus, the collection tactics and tools that a bankruptcy trustee has at his or her disposal are ruthless. They have many more opinions at their disposal than does a state court.
FAQs on Avoiding Paying a Judgment
The following are frequently asked question se get about avoiding the payment of a judgment.
FAQ #1
Can you set up an asset protection structure after somebody sues you?
Yes, you can but asset protection works better when set up in advance. For example, there are ways that an offshore asset protection trust can protect you after the fact. The key thing to know is that when you need asset protection, don’t head scratch. Trust the experts and act right away. Many lawsuit defendants and debtors die slow and painful deaths through paralysis of analysis. Don’t let that be you. There are five steps for asset protection from lawsuits. Read our article on this topic to learn more. Then take action.
FAQ #2
I’m nervous about putting my money offshore. Is it safe?
We can best answer this with another question. If you have a 100% chance of the courts back home taking all or most of your money, is it safe?
Each year, Global Finance rates the top 50 safest banks in the world. As of this writing, only four of the top 50 are in the US. The safest US bank is number 35 on the list. Thus, there are 34 banks in the world that are safer than even the safest US bank.
So, to answer the “safe” question, yes. We have found It is safe when you set it up properly in the proper jurisdiction.
FAQ #3
What happens if I do nothing? If I don’t protect myself?
When a judge bangs the gavel and enters a judgment against you, here’s what happens. The creditor’s attorney records that judgment and can start seizing your non-exempt assets. Don’t get caught with your head in the sand. You could wake up one morning and find your bank account drained dry. You could end up homeless, living under a bridge drinking wine out of a paper bag. We may think we’re special and it won’t happen to us. Don’t be surprised. It happens every day.
Want to Avoid Paying a Judgment? Do This
Are you worried about an actual or potential lawsuit. Do you want to avoid paying a judgment? Fill out a free consultation form on our website or call one of our on-staff attorneys or consultants right away.
