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How the rich make themselves judgment proof!

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  • How the rich make themselves judgment proof!

    We get quite a few questions about being judgement proof, and for most people who come to this forum, it usually means they have no non-exempt assets (and some have no assets at all). Others try to create some crazy statute of limitations scheme, but being judgment proof is not just for the poor.

    Thus, perhaps to satisfy your curiosity, and give you some interesting information about how to "really" judgment proof yourself.

    To be truly judgment proof, your assets must not be subject to the power of any U.S. Court. After all, it is the U.S. court that can issue orders to banks and employers to turn over funds, freeze your assets, foreclose your home etc.

    What the rich do is move all their liquid assets "offshore" (liquid assets are cash and securities). The word "offshore" often raises eyelids because it is seen as shady, but it really is how it is done and it is legitimate. Here is how it works.

    PERSON A forms a Trust (for short, we will refer to the trust as APT) under the laws of the Cook Islands (they are located in the South Pacific near New Zealand), and the Trustee is a Cook Islands Trust Company (such as SouthPac Group). Then, Person A forms a Limited Liability Company (LLC) in Nevis (in the Caribbean). PERSON A is appointed "manager" of the LLC, but the "Owner" of the LLC is the APT. Then person A transfer all their assets into the LLC. This is merely a paper transaction, PERSON A does not really have to open accounts in NEVIS. However, it is generally recommended that the cash assets be put into Swiss Bank Accounts. (remember, the goal is to put your assets beyond the reach of the POWER of the US government, so you don't want them in U.S. Banks, even if the account in the U.S. bank is owned by an Offshore LLC). Also, the reason the APT and the LLC are in different countries is because it is preferable not to have the trust and the trust assets in the same country.

    On a side note, it is legally significant that Person A is merely the "manager" of the LLC and not a "member (or owner)" Being a manager is like being the CEO, you make all the decision. This is how PERSON A retains control of their assets. PERSON A, as the manager of the LLC can do what ever they want with the assets, i.e. make purchases, trades, withdrawals, whatever. The reality is, PERSON A's interaction with their accounts does not change by placing them in the offshore LLC.

    The other great thing is that now that the assets are offshore, and the LLC is a "single member LLC, i.e. the only member/owners is the APT), it is a non-taxed entity by the IRS. So PERSON A never pays any tax on gains, nor does the LLC.

    Here is the other neat thing...most of you are aware of Fraudulent Transfer Law. So you might be asking, if you make these transfers during on ongoing suit or active creditor collection, can't the US court get the assets. The answer is NO, because there is no treaty between the Cook Islands and the US. Thus, a creditor would have to sue in the Cook Islands, and guess what their Fraudulent transfer look back period is, ZERO years. The Cook Islands has even thrown the US Govt. out of court (specifically the FTC) when they were trying to get assets from a person who committed securities fraud).

    Generally, it costs about $30,000 to set one of these up and the annual up-keep is about $3,500-$4,000

    However, the APT only works for liquid assets, i.e. cash, stocks, bonds etc. You cannot use this for real estate, or other "real" type assets, cars, airplanes, accounts receivables etc. Here is what you CAN do...

    Quite a few people on this forum get thrown into a chapter 13 because they have too much equity in their house. The only way to eliminate equity is to encumber it somehow, but not too many people can afford the payments. However, if you have a lot of equity (and frankly, what I am about to suggest is really only cost effective if you have $900,000 or more in Equity, because of the minimum fees involved).
    Step 1: you need to set up an offshore trust, the APT as discussed above.
    Step 2: A bank in Nevis will issue an interest only mortgage up to 95% of the equity, in this example, 855,000.
    Step 3: Simultaneously, a bank in the Cook Islands will deposit into your APT a Certificate of Deposit in the amount of $855,000 that pays 0.5 percent more interest than the mortgage rate.
    To clarify who has what...
    The bank in Nevis holds the mortgage and will be the entity that records the mortgage in the US with the local county recorder where the house is located. The proceeds of the mortgage, the money, go from the Nevis Bank to the Cook Island Bank...then the Cook Island Bank turns around and issues PERSON A a CD (Certificate of Deposit). Here is the beauty of it, the interest earned on your Certificate of Deposit pays your monthly mortgage payment.
    The catch is the fee, the yearly fee is 1.2 percent of the mortgage amount and there is usually a 3 year pre-payment penalty.
    The net result, however, is that you have now encumbered nearly all your equity in the house, or at least to a point where the remaining equity is probably not worth the creditors hassle (becasue they would have to pay off your 1st and 2nd mortgage in order to foreclose). And the proceeds of the loan are safely tucked away in your Offshore trust in the Cook Islands in the form of a Certificate of Deposit. The CD serves as additional collatoral to the bank in Nevis that issued the mortgage, so you really can't do anything with the CD.

    Anyway, I figured this might make for some interesting reading for you. Why this ultimately works is because of the various treaties, or lack thereof, among the countries. For example, you could not do this by forming an APT in Canada, because the U.S. and Canada, because of various treaties, are practically one country and the U.S. courts and Canadian Courts have liberal reciprocity.
    Last edited by HHM; 02-18-2007, 12:13 PM.

  • #2
    Thanks for explaining how the very wealthy protect their assets in bankruptcy, HHM. Just goes to prove once again how the power of a lot of money tilts the table in the rich person's favor. Also shows how those of us who have little to no wealth (and therefore no real power in the system) have been set up by our own Congress to get stripped of pretty much everything, including our dignity.
    Last edited by lrprn; 02-18-2007, 01:35 PM.
    I am not a lawyer and this is not legal advice nor a statement of the law - only a lawyer can provide those.

    06/01/06 - Filed Ch 13
    06/28/06 - 341 Meeting
    07/18/06 - Confirmation Hearing - not confirmed, 3 objections
    10/05/06 - Hearing to resolve 2 trustee objections
    01/24/07 - Judge dismisses mortgage company objection
    09/27/07 - Confirmed at last!
    06/10/11 - Trustee confirms all payments made
    08/10/11 - DISCHARGED !

    10/02/11 - CASE CLOSED
    Countdown: 60 months paid, 0 months to go

    Comment


    • #3
      Originally posted by lrprn View Post
      Thanks for explaining how the very wealthy protect their assets in bankruptcy, HHM. Just goes to prove once again how the power of a lot of money tilts the table in the rich person's favor. Also shows how those of us who have little to no wealth (and therefore no real power in the system) have been set up by our own Congress to get stripped of pretty much everything, including our dignity.
      Strictly speaking, this protects them from having to file BK in the first place since no creditor can get at any asset, there is no need to go bankrupt. But you are correct, wealth expands a persons options.

      This is why Doctor's in Florida, for example, never end up paying damages for malpractice claims.
      Last edited by HHM; 02-18-2007, 02:19 PM.

      Comment


      • #4
        HHH, great info. I just posted soem thoughts to the BK 13 forum, but perhaps they belonged here. I am not rich or wealthy, but I am in a situation where I can live very comfortably in a state that exempts 75% of my cash(wages)assests (I only have wages and two cars that have no equity). It has only dawned on me recently that either way, BK or quit paying everyone their inflated interest, tht my credit score is in the tank. However, I can see that what the wealthy can do with their offshore accounts, I might be able to do with forcing garnishments on myself. Is this fraudulent? If I stop paying unsecured creditors and tell them to seek a judgment until I can get my financial picture together, is this legal? Can I "stack up" a dozen garnishments back-to-back (my employer doesn't care)? What am I not seeing here?

        Comment


        • #5
          Although I know you have posted throughout this forum, I do not recall your situation specifically. So, I will not venture to guess whether you would be committing fraud. What I posted about off shore accounts is perfectly legal and not fraud.

          Fraud is when you induce someone to take action based on information you know to be false or misleading (i.e. lieing about your income on a credit appliction). A fraudulent transfer of assets is where defined by statute but is basically the transfer of any asset within a set amount of time, i.e. usually 2-4 years to intentionally avoid known creditors.

          I suppose my question to you, why let any creditor garnish your wages. In the long run, it would be cheaper for you to file BK, either a chapter 13 to 7, than to let creditors continously garnish your wages. Without more info, it is hard to say, but I think what your missing is that judgments last until satisfied or discharged in BK. Thus, you may not have any assets now, but you might in the future and those judgments can be used to seize those assets.

          Comment


          • #6
            Moving liquid asset off shore appears to be the fool proof asset protection method.

            But it is far from the only effective method.

            Just ask OJ....He has a multi million judegment againts him, and he is raking in 20-30k a MONTH.....money that cannot be touched... thanks to a well planned out financial arrangement....

            What off-shore transfer can do that other methods have a hard time achieving, is to make it possible to escape fraudulent transfer. You can conceivably transfer asset after the liability has arisen. That said, I have heard that in the recent years, the US Court has had it with this scheme and has been out holding your in contempt if you carry out such off shore transfer when you are in the middle of a lawsuit.


            The most prudent approach of asset protection, is to plan ahead, before a liability has risen, AND before the look back period according to your state's statutes, in case you need to file.

            Comment


            • #7
              Spartan, This is what s***ks about the current BK 13. My income is drastically decreasing. If I can hold out until my 08 contract is written in August of 07, I'll have a very solid contract to present to the trustee. Until then, I see no option other than to let the cards fall where they may. In the meantime, I'll cover secured debt and student loans, and ignore the others. If they want to get a judgement and garnish my wages, so what? I could protect, by state law, 75% of my wages, that's a heck of a lot more than I currently have available. If I cared about "future assets," I sure wouldn't consider BK13. But, I now realize that a middle class American like myself can find other opportunities within the law to protect cash (wages) assets, at least 75% in my state. Do I really want to let garnishments back up until they are 20 deep? No. However, I'm not going to roll over into a bankruptcy coming out of a year of highest-ever-income, only to get into a situation where every 3 - 6 months I have to modify a plan downward. Id rather be closer to the bottom of my six-month average than the top. I'd rather be in a 50 - 60% payback plan, than starting in a 100% payback plan. Maybe I'm stupid, but the BK13 laws are a reflection of disposable earnings at the time you file, not the true projected income one might expect over the 5 years of a payback plan. In my opinion, it is far better to declare bankruptcy when you absolutely must declare to save homes and/or vehicles or when one reaches their bottom disposable income. "Projected" income is a farce under the average past 6 months salary situation. Better to play the "onshore" games temporarily, if you know you need to file but have to wait until a better picture of income is established.

              Comment


              • #8
                (fyi TH - I deleted your duplicate post)
                Let me start by saying my opinion won't be objective since hubby and I chose the Ch 13 route ourselves.

                About your "onshore - let 'em garnish my wages" approach, TH - it might work for you since you are in a very bk-friendly state. Also as a single person making a higher income, you are not the typical Ch 13 filer. Deliberately inviting collection lawsuits that will show up on a credit report for years and years plus impact future financial decisions for decades to come makes no sense to me if by filing Ch 13, everything non-secured is wiped out, plus big assets are protected from seizure - all in return for 60 months of very careful budgeting and doing without. Once we emerge at the end, we're done. Free and clear. No strings attached. All assets are ours and we start fresh. You won't have any of those same advantages after the garnishment and repossession lawsuits are won by your creditors, ever. As I see it, the only way to reverse the garnishments will be to pay off the debts in full over many years or file bankruptcy. What's the point of waiting unless you are using the garnishments solely as a delay tactic to reduce your six-month income figure before filing?
                Last edited by lrprn; 02-19-2007, 12:04 AM.
                I am not a lawyer and this is not legal advice nor a statement of the law - only a lawyer can provide those.

                06/01/06 - Filed Ch 13
                06/28/06 - 341 Meeting
                07/18/06 - Confirmation Hearing - not confirmed, 3 objections
                10/05/06 - Hearing to resolve 2 trustee objections
                01/24/07 - Judge dismisses mortgage company objection
                09/27/07 - Confirmed at last!
                06/10/11 - Trustee confirms all payments made
                08/10/11 - DISCHARGED !

                10/02/11 - CASE CLOSED
                Countdown: 60 months paid, 0 months to go

                Comment


                • #9
                  Originally posted by Spartan View Post
                  Moving liquid asset off shore appears to be the fool proof asset protection method.

                  But it is far from the only effective method.

                  Just ask OJ....He has a multi million judegment againts him, and he is raking in 20-30k a MONTH.....money that cannot be touched... thanks to a well planned out financial arrangement....

                  What off-shore transfer can do that other methods have a hard time achieving, is to make it possible to escape fraudulent transfer. You can conceivably transfer asset after the liability has arisen. That said, I have heard that in the recent years, the US Court has had it with this scheme and has been out holding your in contempt if you carry out such off shore transfer when you are in the middle of a lawsuit.

                  The most prudent approach of asset protection, is to plan ahead, before a liability has risen, AND before the look back period according to your state's statutes, in case you need to file.
                  I do not mean to imply that off shore is the only way to go, this is merely an information post. Regarding contempt issues, the Supreme court has consistantly ruled that civil contempt in off shore transfer cases is unwarranted. The legal reason being is that if the person refuses to pay, the civil contempt then becomes punitive, and thereby unconstitutional. So although civil contempt is a concern, the US supreme court has consistantly sided with the debtor and held that civil contempt in these cases is wrong.

                  The main difference between off shore and on shore is jurisdication. If your assets are on shore assets, there will always be some US court somewhere that can exercise jurisdiction over those assets, or the person or entity that controls those assets. By moving them offshore, you remove that threat altogether.

                  The big problem with Bankruptcy and assets is that the fraudulent look back period under the new BK law is 10 years, and that look back period supercedes state law.

                  Comment


                  • #10
                    Thanks for the clarification on the civil contempt part, HHM.

                    Is the federal lookback period 10 yrs? I thought my attorney mentioned 2 yrs for federal while my state is 7 yrs. Thus she asked me about any transfer within the last 7 years. She did not mention anything about 10 yrs. I didn't raise any question as the property transfer issue really does not pertain to my case.
                    Last edited by Spartan; 02-19-2007, 02:14 AM.

                    Comment


                    • #11
                      "... If I can hold out until my 08 contract is written in August of 07,..."

                      Conceivably, you can answer any suit filed and force it to trial... by the time the trial has commensurated and a judgement entered against you, and garnishment wit executed, you may be very close to August by then.....

                      Delay tactic may work, if you don't let a default judgement be entered.


                      Note to admin: Perhads the thread can be split into 2? In that way, it wouldn't interfere with HHM's original intent for the thread.

                      Comment


                      • #12
                        Originally posted by lrprn View Post
                        ..... What's the point of waiting unless you are using the garnishments solely as a delay tactic to reduce your six-month income figure before filing?
                        I think that IS what the poster intends to achieve, lrprn.

                        Comment


                        • #13
                          Thanks, Spartan, lrprn, and HHH. My apologies to HHH for digressing on the sticky. I should have posted this somewhere else. I am very frustrated. I just need to get down the road until August or Sept to file. (My six month average income will decrease by $1000 - $1500 per month). I read a faux copy of a local trustee's final confirmation order and it states that one must report immediately any change in actual or projected (strange wording) ANNUAL income above 10%. If I can get down close to my base salary, then five years will be easier to tolerate than the few months I might have to deal with a few judgments and possible garnishments. Again, I apologize for digressing from HHH main post.

                          Comment


                          • #14
                            Here in New York 90% of wages are exempt from garnishment. And all IRA's and other retirement plans are retty much so. Also cash value life insurance policies.
                            Regarding the off shore stuff are you saying that even if a creditor finds out by deposing the debtor about where his or her assets are the debtor cannot be either convicted of perjury or somehow forced to turn over assets under penalty of contempt of court? Just curious-don't see any pratical value in any of this for poor people like me execpt as per above.

                            Comment


                            • #15
                              US Dollar accounts

                              Since this old "Sticky" is still on the board, I would mention that you can open an account in Canada in US Dollars. It will not be reported to the US IRS as long as it is non-interest-bearing (e.g. checking account). It WILL get reported if it is a savings account and bears interest. If it is a US Dollar account you can even use it for direct-deposit of your earnings and write checks on it to pay your bills. It remains quite beyond the reach of US creditors until they go to the effort of filing suit in Canada and plead the Canadian Court to recognize the US Judgment. But that still requires a hearing and probably a trial, all of which takes time and money and you can nullify the effort by simply moving the funds to yet another account in the UK or in Western Europe.

                              When you open a Canadian account, you will need a "reason." Tell them that you are planning to purchase local real estate. Lots of Americans do.

                              To avoid disclosure issues when being interrogated post-judgment by a creditor, simply have the account titled in the name of the wife. You add yourself on as a signatory by power of attorney. Your name is not on the account, nor as a signatory on the account card. It does not belong to you, so it is not subject to disclosure to anybody including the IRS. Of course, be sure your marriage is solid as the proverbial Rock of Gibralter, or the wife will have it all!

                              I avoid Swiss accounts as they attract so much attention with the IRS. Why do that when you can open an account in Spain in an English-speaking "colony" like Alicante? Unless you want to speculate in currency exchange rates and want to pay extra fees, then stay out of Euro accounts. (Euro accounts did really, really well over the past six years; maybe not in the future).

                              Comment

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