Protecting your assets from lawsuits

It’s on nearly every list of the most popular New Year’s resolutions — getting out of debt. Lately, it’s been right up there with that perennial favorite, losing weight. For those fortunate enough not to know the feeling of impending doom that comes with large debt, congratulations. The problem is a huge one. In 2011, in Maryland alone, there were more than 25,000 bankruptcies filed. Staggeringly, that’s is a decrease of nearly 14 percent from 2010, when the number surged to almost 30,000, increasing by nearly 15 percent over 2009.

I have spent the better part of the last two decades working closely with people who have gotten in over their heads. Sometimes it was simply poor planning, but more often than not, it was an unexpected event. Most you can probably guess – medical bills, family problems, and job loss just to name a few. But one major risk doesn’t seem to make it onto anybody’s radar screen even though it has been the subject of many “special reports” — unforeseen litigation.

Many people believe that if they are not in business for themselves, they don’t need to worry about litigation. Others believe that if they insure themselves, they are immune.  I have heard lots of reasons why people believe they are safe.  Unfortunately, most are wishful thinking. There are very few ways to protect yourself against an unfounded lawsuit. The judicial system in this country is designed, as it should be, to give people their day in court whenever reasonable. While this system generally works as well as any system could, there are, as there must be in any imperfect system, situations where the system is abused. Insurance is helpful, but I have seen more than my share of cases where insurance has refused to cover a situation, or where the insurance coverage was insufficient.

While there is no real way to keep yourself from getting sued, there are ways to make yourself a smaller target. Probably the easiest and most direct is to put yourself in a position where, even if you lose, the winner would not be able to collect. Remember that a judgment in a court of law is little more than a piece of paper saying that one side owes the other money. The value in the judgment is the ability to collect on it. This is done in a variety of ways, which include, within the limits of the law, taking possessions or accounts owned by the defendant and turning them over to the plaintiff. If the defendant has nothing to take, the judgment has very little value. Perhaps more important, if a plaintiff knows that the best possible result of a lawsuit is a useless judgment, he or she may think twice before incurring the legal fees to get it.

So, on a practical level, how does one keep his or her property from being available to people who may obtain a judgment? The law is very clear that people may not transfer away property in an attempt to hinder, delay or defraud the people to whom they owe money. But there are ways to legally and ethically protect yourself. Frequently, these include certain kinds of trusts, LLCs, or other models designed to allow a person to control assets that he or she does not own. However, just as it is easier to never gain weight than it is to try to lose it, it is also easier to protect yourself NOW, before there is a lawsuit filed against you, than to wait and try to protect your assets later. As an added benefit, it takes a whole lot less time on the Stairmaster to protect your assets than it does to lose a pound.

As with other areas of law, proper asset planning requires a complete analysis of facts and circumstances relevant to each individual’s situation. Nothing in this column should be considered legal advice nor should it be acted upon without obtaining your own legal counsel.