Can someone craft a trust to avoid a creditor lawsuit?

Can someone craft a trust to avoid a creditor lawsuit?

On Behalf of | Nov 8, 2023 | Firm News

When someone owes a business money, they generally have an obligation to pay in full or negotiate a specific payment arrangement that both parties believe is reasonable. Expecting someone to fulfill their financial obligations is reasonable, especially when a creditor will take monthly payments in lieu of immediate payment in full. Unfortunately, there are many people who go to great lengths to avoid their financial responsibilities. Some people quit their jobs or change their phone numbers to avoid collection activity. Others may take drastic measures in an attempt to avoid creditor actions.

Successful debt-related litigation could lead to a lien against a debtor’s personal property, such as their primary residence. People who know that they have defaulted on a financial obligation may sometimes try to avoid those responsibilities by changing the ownership of certain assets. For example, someone may craft a trust after or just before defaulting on a debt. Will that effort prevent a creditor from collecting what is due to them?

Trusts can be a source of financial fraud

Trusts are legal instruments that hold assets on behalf of individuals or families. Trusts protect assets from creditor actions and keep certain resources out of probate court when someone dies. They serve a variety of purposes and often originate from a legitimate desire to protect certain assets or family members.

However, some people can and will abuse trusts. They will make fraudulent transfers to a trust with the intention of avoiding their financial responsibilities. Thankfully, the California courts do recognize that people sometimes abuse trusts as a way to avoid personal financial liability. The California Uniform Fraudulent Transfer Act allows creditors to question certain financial moves.

If someone started a trust years before they had financial issues, then it may be an uphill battle to try to take action against any of the assets in the trust. However, if someone owned certain assets until recently and only just moved them into a trust, creditors may be in a position to raise claims of fraudulent activity in civil court. Especially if the transfer occurred after incurring a debt or made the debtor insolvent on paper, creditors could challenge the transfer in court.

Judges sometimes allow creditors to move forward with collection activities that a trust might otherwise prohibit due to the fraudulent circumstances affecting the situation at hand. As a result, seeking legal guidance and better understanding the rights of California creditors may make it easier for businesses to hold individuals accountable for their unethical and potentially fraudulent financial behavior.