We tend to think of the law as a rigid structure, unless of course it’s bending to help us. On the other hand, the law also might bend against us… and that can be rather unsettling, especially when you are a debtor attempting to protect your assets.
Unfortunately, it seems creditors win most of the asset protection cases brought to court. In fact, a review of such cases suggests that courts have a bias in favor of creditors over debtors. Jay Atkinson at Forbes recently weighed in on why that is so and offers a glimpse into the politics and psychology of the court. Since asset protection is often a component of a good estate plan, I thought you might find it instructive.
Truth be told, assessing the value of asset protection is not something that can be done by merely scanning a record of court wins and losses for debtors and creditors. Why? Consider this: Creditors, by nature, tend to be the litigants who are after something. That means they can call it quits if they feel their legal position is not particularly strong. And if that is the case, they are more likely to pursue an out of court settlement.
Debtors, however, have to stay on the defensive no matter how much ground they’re forced to surrender. This means that most of the court precedents and legal interpretations are going to be pro-creditor, because the only way the court can affect change is by coming to a decision. If the decisions are always victories for creditors, then it follows that the precedents will also be pro-creditor. As Atkinson concludes: “The cases that are ‘good’ for debtors usually settle; the cases that are ‘good’ for creditors will probably go to a decision and thus ‘make law.’” That is about as well-summarized as I have seen on this topic.
Atkinson has some more to say, particularly on the topic of judicial psychology, but the main lesson here: Court is not a “friendly” place for debtors. Indeed, as Atkinson points out, proper asset protection is really all about avoiding court or the need for a court decision. Simply put, proper asset protection is about proper planning and having it completed far ahead of time.