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Surviving Financial Meltdown.

By Rob Lambert - Email Editor

Date : April 10, 2008

Sometimes good, intelligent and careful people get into financial trouble. When that happens most panic and start considering, or actually doing, lots of stupid things that are sure to take them out of the frying pan and into the fire. I don’t want this to happen to any of my readers.

For the next few newsletters I will be outlining some of the helpful and not-so-helpful things you might consider if your financial world is melting down around you. This is particularly relevant as our economy turns even more sour and the purveyors of slaphappy, ineffective Asset Protection and financial planning are getting an ever increasing forum on the Internet for their flawed ideas.

Today I wanted to talk about a very simple technique which can sometimes be used by somebody whose financial world has collapsed to get the debtor the equivalent of a fresh start. This doesn’t work for many people; however, if it is right for you, it can let you get back on your feet no matter how bleak your financial situation.

Consider some brilliant person with an idea whose financial world has crumbled. Assume that he has judgments coming out his ears. He is probably a good candidate for chapter 7 Bankruptcy, but for some reason, does not go this route.

It is clear that this person, operating as an individual, makes a mistake if he turns his idea into reality when he is burdened with numerous outstanding judgments. If this person hits the mother load and ends up being the inventor of the next great widget or some fancy Internet site, he can count on his judgment creditors grabbing those assets. One of the problems with being a judgment debtor is that your future brilliance is available to compensate your past creditors if you develop your ideas in your own name.

Instead, let’s assume that the same guy with the numerous judgments puts together a properly designed trust to own a company that is formed to develop and exploit his brilliant ideas. If the trust is done correctly it will be treated as a separate entity for debtor/creditor purposes AND assets owned by this trust will not be treated as owned by the judgment debtor. The assets owned by the trust will not be the property of the debtor and will therefore NOT BE AVAILABLE to the debtor’s creditors. [Remember the first rule of Asset Protection: What you don’t own can’t be take from you.] Assume further that this idea works and THE widget is born. VOILA, the entity owned by the trust is now valuable…. and the assets should not be available to the creditors of the judgment debtor.

To do this requires unique facts. First, the act of funding the trust must not be a fraudulent conveyance. This normally means that the trust cannot be funded with valuable assets. ALL meaningful development must take place in the protected structure after the structure is formed. This only protects sweat equity and only if all the sweating is done as an employee of the entity owned by the trust. Further, to make this have a decent chance of working, the judgment debtor must pay himself a fair salary which will be available to creditors (how much so depends on the laws of the State where the business is located).

I have watched this simple technique allow people beset by problems the opportunity for a fresh start, independent of bankruptcy. This isn’t perfect and it doesn’t work for all people; however, when it does it can change lives.

Next week, more on the good, the bad and the ugly sides of financial meltdown. Hopefully this information will help you or somebody you love avoid making mistakes.

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