Businesses trying to collect valid debts often have an uphill struggle. Those who intend to fulfill their financial responsibilities usually do so with minimal oversight. On the other hand, those trying to avoid their financial responsibilities can take extreme measures to avoid paying their debts.
Companies trying to hold individuals accountable for past-due payments and large financial obligations may need assistance. Legal action is sometimes necessary to hold people accountable for the failure to prioritize repaying their debts. In some cases, creditors may be able to prove that people engaged in illegal behavior to deny their creditors payment in full.
One of the tactics people occasionally use to avoid financial responsibility is to use a trust to protect their property from collection activities. Can the creation of a trust prevent a creditor from holding an individual financially accountable?
Fraudulent transfers are potentially actionable
Timing is everything in terms of the use of a trust to protect assets. In theory, a trust becomes the legal owner of the assets transferred as trust funding. However, outside parties can sometimes reverse transfers or hold people accountable for inappropriate transfers when their intention was to avoid financial responsibility.
If an individual started a trust years ago and then later experienced financial challenges, the trust can effectively protect their property from creditor claims. Property transferred to a trust in good faith is generally not vulnerable to collection activity against the individual who established the frost.
However, the timing of the transfer could raise questions about the intention of the trustor. If people establish a trust immediately before defaulting on a loan or when facing aggressive collection efforts, then creditors can reasonably claim that the establishment of the trust and the use of assets to fund the trust was an attempt to fraudulently avoid financial responsibilities.
Trusts do not provide protection in cases where debts already existed or where collection activity was already likely at the time of the trust’s creation. Learning that all valuable resources once owned by a debtor now belong to a trust can be upsetting and downright demoralizing. Thankfully, creditors have legal rights when people attempt to fraudulently avoid their financial obligations.
Reviewing financial behavior with a skilled legal team can be an important part of holding individual debtors accountable. Fraudulent transfers to trusts do not necessarily protect assets from litigation and debt collection efforts.