Some people make it very hard to collect on a debt. Most individuals who owe money are earnest in their attempts to fulfill their financial obligations. However, there is a small subset of the population that may go to great lengths to avoid personal financial responsibility.
People who have significant debts sometimes change addresses or intentionally reject their mail to avoid legal notice. They may quit their jobs to avoid wage garnishment attempts. People may also try to hide or protect their assets. For example, they may take property that could be at risk of liquidation during collection efforts and transfer it to a trust.
In theory, assets used to fund a trust belong to the trust and are therefore not helpful for creditors trying to collect on debts. However, some transfers may be fraudulent and pave the way for legal action.
What constitutes a fraudulent transfer?
Some people plan financially well in advance of having any personal financial issues. They may move most of their valuable property to a trust as they accumulate it as a means of protecting those assets from divorce, litigation or collection efforts. Provided that the trust itself existed before the collection issue arose and that the debtor did not conduct transfers after taking on the debt, assets held in a trust may have protection from most collection efforts.
However, transfers that take place during collection activity or after incurring a debt may constitute fraud. Creditors can challenge the decision to create a trust while already substantially in debt. They can also question the validity of transfers that took place after the debt originated or in the midst of collection efforts.
The courts can reverse fraudulent transfers in some cases. They can also hold debtors accountable for the value of the assets inappropriately transferred to a trust. Creditors may be able to review recent financial activity through the right of discovery during a civil lawsuit related to an unpaid debt. What they uncover about an individual’s financial conduct could help them collect on a valid debt.
Challenging or reversing a fraudulent transfer is one way for a creditor otherwise denied financial recourse to hold a debtor accountable for what they owe. Business creditors may need help evaluating collections options when a debtor makes an effort to avoid financial responsibility.