Protecting Yourself from Creditors
Your creditors want your money. They want it NOW, and they probably want it ALL. The fact that you have some of earmarked for such foolish expenses as food, clothing and shelter doesn’t matter to them. This section of our web site will give you some hints on making it difficult or impossible for a creditor of yours, even if armed with a Judgement, to take your assets.
The Creditor’s favorite target – your wages:
Your income is your creditors’ favorite target simply because, unlike a car or a bank account, wages can be attached time and time again until the debt is finally paid, or you leave that employer. Some states, like Pennsylvania and Texas, do not allow wage garnishments. Others, like Michigan, restrict each garnishment order to only one paycheck. After that paycheck has been garnished, the creditor has to file another garnishment order to collect again. Most states, however, allow a garnishment to remain on a paycheck until the debt is paid in full.
Garnishment is the legal term for the court-ordered requirement that your employer withhold a part of your earnings and send that money to your Judgement-Creditor. While the exact percentage can vary from state to state, a Garnishment cannot ever leave you with less than thirty-five (35) times the Federal minimum wage. At this time the Federal Minimum Wage is $5.15 per hour, so your NET paycheck can not be less than $180.25 per week.
Strategies to frustrate the garnishment:
There is not a lot you can do to avoid a garnishment if your creditor has a Judgement and knows where you are working. Obviously, if you can, changing employers will stop the Garnishment. A creditor can only garnish a paycheck they can find. If they don’t know where you are working, don’t tell them. Don’t apply for credit, and don’t answer any questions they may ask. Just because a creditor asks a question does not man you HAVE to answer it. The ONLY exception to this is an INFORMATION SUBPOENA (see the link), which is a Court Ordered Questionnaire which you must answer under penalty of Contempt of Court. The good news is, in more than 30 years in this field, I have only found TWO collection attorneys smart enough to use an Information Subpoena.
Another way to frustrate a garnishment is to load your paycheck with other deductions that take priority over the Garnishment, and that you will either have to pay or will get back at some future time. If you owe Alimony or Child Support, get them BOTH onto Payroll Deduction. Increase your Federal and State tax withholding. Try to get your pre-garnishment take home pay below the $180.25 Federal Minimum. If you owe Federal or State taxes, the excess withholding will pay those debts off earlier. If you don’t then the excess withholding will be refunded to you next February when you file your tax returns. Creditors generally cannot attach your tax refund. I realize it may not be easy to live on 180.25 a week, but that’s what you will have to do to frustrate a garnishment.
A large garnishment can be your best friend in states where garnishments stay in place until paid. Let’s assume ABC Company sues you for $15,000 and gets a judgement. They file a garnishment order with your employer. You earn $400 per week. Here in Arizona, where the Garnishment rate is 10% of Gross Income, that is $40 per week. Not counting interest, it will take 375 weeks (over 7 years) for the next company to get paid. Factor in the interest at 9% and #2 may never get paid. That information may just be enough to get all other creditors to negotiate a great settlement deal (more on how to do that later in this section) just to get SOMETHING rather than still be standing on line the day you retire. Then, after all your creditors have settled except ABC, you change jobs and leave ABC as your only creditor, and they can’t find your job to garnish. Of course, if a company YOU happen to own also happens to be garnishing your salary for a large debt owed, then the others will just have to wait in line.
Strategies to frustrate Bank Account Attachment:
Armed with a judgement your creditors can take your entire bank account – if they can find it. Here are some ways to make as sure as possible that doesn’t happen.
When I was a bill collector one of my best routines was to send the debtor a check for $1.14. Accompanying the check was a letter saying we collected an illegal late charge. When the check came back in my bank statement I knew exactly where the debtor did his banking from the endorsement and stamps on the back. You can bet the next Friday that bank got a Seizure Order. For $1.14 (which I just added back onto the debtor’s account) I got several hundred dollars. The lesson is simple – don’t cash small checks your creditors send you. If you must, sign them over to a friend or relative and let THEM cash it (in a different bank where you bank, that topic is next).
Bill Collectors routinely contact banks near where you live or work to find out where you bank. Many larger banks have an “account locator service” that may or may not tell a bill collector if you have an account at that bank. If you live in a small town or small city where there are a limited number of banks, some bill collectors will just serve them all with a Seizure Order and see which one works. The solution is the Internet. I live in Tucson, Arizona and I do my banking in St Paul, Minnesota! The contents of that account is kept small, and most of my bank deposits are kept in a cyberspace bank. Let the bill collector find THAT. Follow this link for a list of Internet banks you can use.
I do not recommend titling your accounts in your children’s names because if found out that could be construed as “in fraud of creditors”, which is illegal. Moving your banking to the other side of the world, in your own name, is perfectly legal.
Strategies to frustrate Car Repossession:
The rules here are different for the two types of repossessions. One type is when the Lienholder (the company on the title) repossesses the car and the other is when a Judgement Creditor repossesses.
Lienholders are much more prone to repossess than Judgement creditors for two reasons. The first is that the Lienholder only has to cover about $350 to 500 in repossession and sale expenses before realizing money towards the debt. A Judgement Creditor has those expenses PLUS the full balance left on all liens on the car. The economics of a Lienholder repossession are much more creditor-friendly than that of a Judgement Creditor. Second, in dealer-arranged financing it is possible that the lender and the dealer have a side arrangement wherein if the car is repossessed before a certain number of payments are made, or at all, the dealer will pay off the loan and take over the debt. This is called “Recourse” and you will not know if the loan is a recourse loan and what the recourse terms are. Judgement creditors have no recourse.
Making your car safe from the Lienholder merely means that is one creditor you will have to pay. Making the car safe from other creditors means loading the car up with liens. I have a friend who actually put his dog, named Howard, on his car’s title as a lienholder. No sane judgement creditor will repossess a car with more than one lienholder on it. Considering that most people who owe money on their cars are “upside-down” (meaning they owe more than the car is worth) with ONE lien, two mans they are not only upside down, but probably inside-out also. So…. Get a friend or relative to give you a loan, and secure it with a lien on your car.
Trusts – do they work?
Many people feel establishing a Trust is the way to make yourself “Judgement Proof”. A Trust is a legal entity that is established to perform certain specific functions. The most common purpose of a trust is to administer the assets of someone who died until they can be distributed to heirs. A Trust can either be revocable or irrevocable. The owners of this site caution you to NEVER establish a Trust without the advice of a competent Attorney and Tax Advisor. My experience is that Trusts are an expensive and often unsuccessful tool for this purpose. The reason is because most trusts not administered by professional Trustees become so “transparent” that they cease to exist and a sharp lawyer can convince a judge that the Trust is “in fraud of creditors”. Let me define some terms:
“Judgement Proof” doesn’t mean you can’t be sued, and that a creditor cannot get a judgement against you. It only means that a judgement is useless against you because the judgement-creditor as no way to collect on the judgement. I like to compare a Judgement to a hunting license. Every year, millions of people buy hunting licenses. Not all of them are successful in the hunt. The license just gives them permission to look for a deer to shoot, it doesn’t guarantee a deer. Judgements are similar – gives a creditor the right to grab assets, if they can find assets. No assets, or assets out of reach of creditors is Judgement-Prof.
“Transparent Trust” means that the Trust has not been treated as a separate entity from its Grantor or Beneficiaries. As the Grantor (the person who set up the Trust) makes the wall between the Grantor’s affairs and the Trust’s affairs so thin that the wall eventually becomes transparent and nonexistent. “
“In Fraud of Creditors” is a transaction that is entered into with the sole purpose of making creditors unable to collect, and usually has little if any other reason. Timing is a key element in this – something done before default is far less likely to be considered in fraud of creditors than something done after the judgement is rendered against you but before the Sheriff can grab the asset.