Asset protection strategies are legal structures or transactions individuals use to shield their assets from potential creditors. While such planning is perfectly legitimate when done properly, when undertaken with the intention to hinder, delay, or defraud creditors, it may be deemed a “fraudulent transfer.” Creditors must understand when asset protection crosses the line.
The Illinois Uniform Fraudulent Transfer Act (IUFTA) creates a remedy when debtors transfer assets as a way to frustrate creditors. A transfer is considered fraudulent if made “with actual intent to hinder, delay, or defraud any creditor,” or if made without receiving reasonably equivalent value in return at a time when the debtor was insolvent, or became insolvent as a result of the transfer. In essence, the IUFTA targets transactions meant to put assets beyond the reach of legitimate claims by creditors.
The IUFTA lists “badges of fraud” — factors that courts examine to infer whether a transfer was made with improper intent, since direct evidence is seldom available. These include: transferring assets to an insider (such as a relative or close associate), transferring the majority of one’s assets, retaining possession or control after the transfer, failing to disclose the transfer, transferring assets right before or after incurring a substantial debt or legal claim, receiving less than fair market value and being insolvent after the transaction.
For example, if someone sets up a trust for the benefit of a spouse or family member and transfers their home into the trust days before a significant lawsuit is finalized, a court may conclude the debtor intended to put that asset beyond the reach of a creditor. Similarly, selling property to a friend or relative for far less than its actual value is a red flag, especially if the transferor remains in possession or continues to use the asset.
Timing is critical in the use of asset protection strategies. Establishing retirement accounts, forming business entities, or purchasing exempt assets (like life insurance or homestead property up to statutory limits) generally are legitimate if not undertaken in anticipation of liability or a creditor claim. However, implementing asset protection after being sued, or even upon learning that a lawsuit is imminent (for instance, after a threatening letter from an attorney or a notice of default), is particularly risky. The courts may infer an intent to defraud creditors simply based on the proximity of the transfer to the knowledge of impending liability.
If a court finds a transfer fraudulent under IUFTA, it can grant remedies to reverse the transfer or attach the asset in question. Creditors may recover the property or its value, and the recipient can face liability. Additionally, attorneys who assist clients with such transfers can be held accountable if they participated in or facilitated fraudulent transfers.
If you are a creditor seeking payment, an experienced litigation attorney can help you take effective action when you encounter an asset protection strategy that seems to be a fraudulent conveyance in disguise.
Schwartz Law Group, LLC in Chicago is a full service commercial litigation law firm serving the metropolitan area and Northern Illinois. If you or your company have a debt collection issue, please feel free to contact us online or call 312-755-3164 for a consultation.
