Michigan Collection Law Blog

My good friend and colleague, Howard Young works for the dark side. He is an asset protection planning attorney. Recently, he spoke at the Institute of Continuing Legal Education Seminar on Debt Collection. He said that he represents wealthy individuals and that if he does his job right, we will collect nothing from his clients. He then gave us ideas and examples of how he advises his clients to protect their assets.

I walked away from that seminar with two concepts that I want to share with you:

1. Discretionary Spendthrift Trusts – This is a trust where someone puts money into a trust for a debtor.

As you may already know, a trust has three parties. The first is a settlor/grantor who gives money or property to someone called a trustee. The second party is the trustee who takes legal title to the property and manages it pursuant to a contract between the settlor/grantor and the trustee. The third party is the beneficiary.

Anyways, these trusts are written to contain language that specifically states that no creditor has a right to reach its assets. These trusts are enforceable and perfectly legal. They are also written to direct the trustee to use his or her discretion to pay bills and debts of the beneficiary. This trust can rent an apartment, own a home and obtain credit cards that it can allow the debtor to use. This is perfectly legal.

A Discretionary Spendthrift trust is used to manage money coming to a debtor from someone else. Examples of such funds are inheritances and gifts. Hence, the trustee has the right to select which debts of the beneficiary he will pay.

Note that the money that is used to settle this trust cannot come from the debtor at a time when the debtor has already incurred a large debt that would otherwise make him insolvent. This is the kind of trust that can be used with the debtor's money only before he incurs such a debt. After he incurs a large judgment, any such transfer of his funds may be viewed as a fraudulent transfer.

2.. Domestic Asset Protection Trust. This is a cool kind of a trust. The language in these trusts sometimes contain a provision that prohibits a distribution made under duress. In one case, a debtor was ordered by a court to direct the trust company to release funds to him to pay a judgment. The debtor said that he could not do so due to the terms of the trust and the local laws of the jurisdiction under which the trust was governed. He was held in contempt and sent to jail for a lengthy time. He appealed stating that it was impossible for him to perform the order issued by the trial court since the express language of the trust prohibited distributions directed by court order. Talk about being between a rock and a hard place.

Alaska was the first U.S. state to adopt laws that allow for trusts similar to those in the Caribbean. It’s a “self-settled” trust where a debtor can set up a trust for himself and make himself the beneficiary. There are now about 12 states that allow this including Delaware. Currently, Michigan is not one such jurisdiction that allows such a self settled trust. But that does not mean that a Michigan debtor cannot set up such a trust under the laws of one of the twelve states that allow such a trust.

However, in order for such a trust to put assets outside of a creditors reach, this sort of trust must be set up before a debtor gets into trouble.Otherwise, any assets transferred to this would be nothing other than a fraudulent transfer.

You can put in all kinds of assets into a trust such as passive assets and even active assets such as a business. This is very helpful because you can still run your business as you wish even though the legal owner of the business is the trust.

There is still a trustee. You are allowed to name your own trust distribution advisor. You name you family member or a good friend. This person tells the trustee when to make distributions to you. You can even veto any distribution made to you. You have to have a qualified trustee in the state in which the trust is settled.

Conclusion.

These trusts represent an amazing set of powers that are retained by the debtor while putting the asset beyond the reach of the creditors. Care must be exercised not only in the drafting of these trust documents, but also with their funding. A trust does not do much for someone unless assets are legally transferred to it at a time when the beneficiary is insolvent.

us. In fact, it will only make even incur larger attorneys' fees.

My advise to my fellow collection attorneys. When taking a creditor's examination, always ask if the debtor is the beneficiary of a trust of any kind. Also ask the debtor if he owns any assets that were transferred into a trust in the previous five years. If the answer is "yes", get a copy of the trust agreement and review to see if the trust is well written or if its weak. If the latter, then attack the trust as a fraudulent transfer or as an alter ego of the beneficiary. I would also subpoena the trustee to find out what role she has in the trust and whether she has any assets in her care and custody that can be attacked.

I just saw a fairly recent post from a "The Credit InfoCenter Blog." It was arrogantly entitled "Now I'm Giving Advice to Consumer Attorneys." To me, this post highlighted why a consumer ought not to seek legal advice from someone who is not an attorney.

In this person's post, she suggests that a debt should counter sue a creditor who files a suit without the proper documentation to prove the debt. Here is the problem. The law in this area has already been decided. If you review my previous posts (May 4, 2008 entitled "Attorneys for Debt Buyers beware...they are on to us!), you will see that unless a debtor drafts a lawsuit to allege fraud against the creditor, that such a counterclaim will necessarily fail. After all, the purpose of a trial is to determine who is right. A creditor bears the burden of proving the debt. If the creditor comes to trial without the necessary documents to prove his debt, he does not violate the Fair Debt Collection Practices Act. He merely loses a trial. But....if the creditor has a history of pursuing debtors without having the necessary docs to back up his claim, well then, he may be engaging in a pattern of fraud. Its a subtle but important distinction. Again, I have laid out the 2 major lines of cases in this instance in my May 4, 2008 post.

If the debtor's counterclaim fails and the court believes that the counterclaim was baseless, the debtor may get hit with sanctions. How angry would the debtor be at having a judgment entered against him for both the balance due on the complaint plus sanctions??!!!

Bottom Line: Please be very careful when reviewing advice from non lawyers. The CreditInfocenter Blog seem to be very well intentioned. However, they should not give advice and further still, ought not to hold themselves out as giving advice to attorneys. You can almost always find a Consumer Rights Lawyer that will spend some time with you for free. Get the right advice from the right people.

My fellow blogger and debt collection attorney, Michael Herrin, recently wrote a blog entry about bogus defenses to debt collection. His blog entry can be found here. He has come across the following defenses from debtors who believe that these defenses are good. He and I have both heard debtors attempt to use these defenses. Unfortunately, they are invalid. Mr. Herrin lists the following bogus defenses:

1. I haven’t heard anything about this debt for several years and therefore you can’t sue
me for it.

2. You can’t sue me because you don’t have a signed contract.

3. I have never heard of the company that is contacting me or suing me and I have no agreement with them, therefore I don’t have to pay them.

4. You can’t sue me because I am making payments.

None of these defenses is valid. I would like to add the following to the list of defenses that are simply not valid:

5. The credit card company has written off the debt so they cannot pursue me. People may see on their credit report that a company has written a debt that was owed by the consumer. The consumer then makes the mistake of thinking that because the credit card company wrote off the debt that this means that no one else may pursue the debt. Remember the credit card debt is transferable. Another company usually purchases the debt and hires a collection law firm to pursue it.

6. In my divorce decree, the court ordered by ex spouse to pay the debt. This is a very common mistake that is even made by some judges. Remember that when you get a credit card from a bank, you enter into a contract with the bank to repay that debt. That is your obligation. Just because your ex spouse has has ordered to pay the debt, does not relieve you of your obligation to the bank.

Bottom Line: If you get sued for a debt, DON'T SIMPLY CAVE IN AND PAY IT. Contact a collection attorney to see if the Plaintiff can sustain its burden at trial (see prior blog posts). If the debt appears to be valid, then have your attorney negotiate a settlement and payment plan. Your attorney can almost always negotiate a better payment plan than you can. She will charge you an hourly fee, but she should be very cost effective.