Florida Asset Protection Blog

Update: Overpaying Taxes To Protect Money From Judgment Creditors

I have recently posted blog articles about a client who is trying to protect money from a judgment creditor by overpaying estimated taxes to the IRS, and when a refund is due from the next tax return, asking the IRS to hold his refund to pay future taxes. I had mentioned that an experienced collection attorney I consulted had no idea how he could attack a debtor’s excess tax deposits with the IRS. Another collection attorney in Florida emailed his suggestion that the creditor could seek proceedings supplementary with a Florida court and ask the judge to use the broad equitable powers granted courts by the relevant statute to command the IRS to turn over the debtor’s tax deposits to the court. A bankruptcy professor did not know the answer and suggested speaking with a tax attorney, which I did.

This week I presented to issue to Mr. Robert Kramer who is a very experienced and well known tax attorney in Broward County, Florida, where he heads his own firm, Kramer, Green, Zuckerman et. al. Robert Kramer has been a tax attorney for several decades and has also provided asset protection planning for many physician clients. Robert said that a general judgment creditor cannot garnish the IRS to collect a civil judgment in the absences of specific statutory authority; such authority exists, for example, for collection of state child support awards. Also, Robert stated that a state court judge cannot enforce an order against the IRS for turnover of taxpayer money to collect a civil judgment because the state court judge lacks federal jurisdiction, and there are no federal statutes giving such power to state courts to collect general civil judgments. In other words, the Florida judgment creditor may have no remedy to get money the debtor transfers to the IRS to avoid his creditors.

No doubt, the excessive payment to IRS to avoid paying judgment creditors is a fraudulent transfer or fraudulent conversion. A creditor’s lawsuit to recover a fraudulent transfer would name the debtor and the IRS as defendants. The judgment creditor would have to sue the IRS (probably in federal court), and even if he could prove the debtor’s intent to evade collection, the civil judgment creditor may be without a remedy to get the money. Sometimes the simple asset protection plans that do not work legally are very effective practically.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Banks Have Incentives To Settle With Judgment Debtors Quickly For Low Amounts of Cash

Everyone knows that it is very hard to negotiate with a bank to modify a bank loan. Banks are difficult creditors to deal with. Yet, after a bank which has already sued and has a judgment against you is a relatively easy creditor. Banks tend to accept very low settlements of judgment debts whether the debt is related to a mortgage, a credit card, or a commercial loan. I never understood why banks tend to settle for "pennies on the dollar", although I assumed they had good reasons to resolve their claims quickly and cheaply. This past week I discussed bank settlement policies with a new client from Chicago who had worked there for the FDIC for many years. He was quite familiar with the internal workings and thinking of commercial banks.

The client explained why banks are anxious to settle judgment debts. I’ll try to paraphrase his explanation in layman’s language. If a bank has a personal judgment against you the bank reports the judgment as an asset. Accounting rules require that the bank mark down the judgment to its present value. Given the difficulty in collecting judgments in Florida against people with financial problems the bank will discount the judgment to a low percentage of face value. Next, the bank has to evaluate both the cost of pursuing collection, including attorneys fees, and also the administrative costs of carrying the judgment. I was not aware that bank’s incur significant administrative expenses of carrying bad debts such as accounting, auditing, and valuation of the debts. Typically, banks find that given the uncertainty of collection, the time and expense of collection, and administrative carrying costs, it is better for them to accept almost any amount of cash offer to settle the judgment debt. Additionally, bank regulations require banks to have capital reserves to offset "bad debts" so that uncollected judgments requiring setting aside capital which otherwise could be used to make new loans.

My retelling of my client’s explanation may not be totally accurate, but I think I understood the general point. Bank accounting and financial regulations render uncollected debts low value assets which are expensive to maintain on bank accounting books. If a bank has a judgment against you start your negotiations with a very low cash offer.

Client Overpays Estimated Taxes Used To Shield Money From Potential Creditors In IRS Account

Often new clients describe asset protection tools they implemented before they first meet me. Their asset protection solutions are usually based on a book they read, a seminar they attended, or even things they read on my own website. Usually, the client’s asset protection strategies will not work because they lack knowledge or experience with important issues, but sometimes I meet people whose own asset protection plan includes creative and possibly effective strategies. As an example, last week a new client described to me how he has already protected approximately $75,000 of cash by overpaying his estimated tax payments. His IRS account showed a positive and refundable balance of $75,000. The client assumed his creditors could neither discovery nor recover his money held by the IRS. At first, I told the client his plan would not work because his credit with the IRS was a non-exempt asset and would have to be disclosed. But upon further investigation, his ploy may be effective.

First, the IRS credit would have to be revealed to a judgment creditor who could examine the client about all assets in a deposition under oath. In a bankruptcy proceeding, I have no doubt that the bankruptcy trustee would demand the client ask the IRS for the money and upon receipt turn over the money to the trustee. A bankruptcy court would enforce the trustee’s turnover request with its contempt power. Outside of a bankruptcy proceeding it may be difficult for a creditor to recover the money.

A judgment creditor outside of bankruptcy needs to use available tools of collection to get a debtor’s non-exempt assets. The creditor can’t simply demand payment; he must recover the judgment using appropriate legal and equitable remedies. An overpayment to the IRS is a non-exempt asset. The question is how does a creditor get the money from the IRS; what is the appropriate collection tool?

I posed this question to a prominent and very experienced collection attorney in Orlando, Fl. He wrote back that he did not know whether there is a tool by which a creditor could attack a debtor’s IRS deposits. His response, paraphrased is, he did notknow whether a creditor can garnish the IRS for money owed by the IRS. He could not can’t find anything that permits it, and therefore, he thought it possible that a judgment creditor cannot reach it. The collection attorney said he searched Westlaw and Google and could not find an appropriate remedy to reach the deposit. He told me that even if there is a way to get the money the remedy would be very difficult for the creditor.

This is not the first time a client has asked me about the protection of IRS overpayments outside of bankruptcy. If a reader knows the appropriate creditor remedy to levy upon the IRS money please send me an email. Even though an IRS overpayment is not exempt, and may be deemed a fraudulent transfer to hinder or delay creditors, it still may be an asset protection device if creditors do not have a cost-effective tool to recover the funds.

Using Money In "Homestead Account" To Purchase Annuity: Is This Fraudulent Conversion

Money received from the sale of a homestead is exempt from creditors so long as you are holding the money to buy a replacement homestead and as long as the sales proceeds are segregated. If you decide to downsize your homestead and use only part of the money to buy a house, can you use the rest of the sales proceeds to buy a protected annuity? The general rule is that using exempt assets (homestead proceeds) to buy another type of exempt asset (annuity) is not a fraudulent conversion. Because the homestead sales proceeds are exempt when you intend originally to reinvest all into a new house it may seem that you can safely use any portion of a homestead account to buy any other exempt asset. Or, do homestead proceeds lose their protection when invested in anything other than a new homestead.

A client had sold a house for $500,000 and had segregated the money in a separate bank account. The client was being sued and was concerned about protecting the funds from the creditor. After searching for an equal replacement house, the client decided to buy something less expensive because he could not afford the taxes and utilities of an equal size house. The client wanted to buy a $250,000 homestead and use the remaining $250,000 to purchase an annuity hoping that both assets would be protected from the anticipated expected civil judgment.

I think the purchase of the annuity would be reversible as a fraudulent conversion under the facts above. Homestead accounts, i.e., money held for replacing a sold homestead property, are exempt based on judicial decisions. There is no statute or constitutional provision referring to a "homestead account." The exemption afforded homestead accounts is contingent and dependent upon the owners intent. The money is exempt when and only so long as the owner intends to reinvest the money in a new homestead. If the money is not reinvested in a new homestead within a "reasonable time" courts will find that the debtor no longer intends to buy a replacement homestead and that the funds are no longer protected from creditors.

When this debtor makes the decision to purchase an annuity with some homestead funds he no long intends to reinvest the same funds in a new homestead and the exemption of funds intended for the annuity is lost. Money used to purchase an annuity would lose its homestead exemption and become non-exempt property when the debtor begins shopping for the annuity. Thereafter, the actual purchase of the annuity would constitute the conversion of non-exempt money into the exempt annuity and would be subject to reversal as a fraudulent conversion if done with the intent to protect the money from the anticipated judgment creditor.

Good Article About Credit Rating Myths

Many people, if not most people, facing a foreclosure or bankruptcy are very concerned about the impact on their credit rating. Clients frequently ask me how will the foreclosure, short sale, or bankruptcy affect my credit and how can they rebuild credit. Credit rating is not a legal issue; I don’t know any legal procedures relevant to credit restoration. From time to time when one of my own clients is in the mortgage underwriting business or car lending business I pass on to my clients or blog readers what these people tell me about credit rating.

This past week the Wall Street Journal published a clearly written article about credit scores. The article summarized the important factors affecting credit score and gave practical suggestions about increasing credit rating. Those concerned about the impact on credit rating of their current financial difficulties should read this article. Credit Scores: Shattering Some Common Myths