Sometimes, to induce potential borrowers/debtors to obtain credit, lenders (or sellers) will agree to charge no interest on what is loaned, or, the unpaid price for a credit sale of goods and/or services.

When a creditor is looming, the debtor may be tempted to give away assets to friendly parties so that the creditor will not have recourse to seize as many assets. This was the impetus behind our laws today that hold such actions as voidable transactions (also known as fraudulent transfers) when the intent behind such actions is motivated by the goal of depriving the creditor of reachable assets, or when such actions render the debtor insolvent or the debtor was already insolvent.

In the recent case of Garcia v. Garcia, the guarantor of a loan (Morris) is sued by the bank to honor his guarantee obligation of about $1.5 million. The debtor was not able to pay under the guarantee, so the bank obtained a charging order against the debtor member’s 50% LLC interest. The bank wanted access to the funds in that LLC, but the third-party manager of the LLC refused to pay any distribution to the debtor member. As a result, the debtor member filed Chapter 7 bankruptcy.

There has been a recent rash of discussions on whether foreign trusts are truly better for asset protection purposes than DAPTS (domestic asset protection trusts), especially DAPTs created by someone who does not reside in one of the states that has enacted DAPT law.

Trusts can protect your assets, to a certain extent. Foreign and domestic asset protection trusts can protect them even more, if you structure them correctly. The jail time starts when you wait until you already have creditors banging on the door before you relinquish control or a beneficial interest in one of these trusts. Unfortunately for one person in California this April, courts call that a “fraudulent transfer,” especially if you do not seem to be getting anything of value in return (other than, of course, being able to exclude assets from a bankruptcy).