Transferring Assets to a Spouse or Relative Before MCA Default: Six Risks to Review

In theory, it makes sense to put all your personal assets in the name of your spouse if you signed a personal guarantee. You will lose your assets to a judgment, but your spouse will not, and you still have all the assets. After all, you live together with all that property. But in fact, a creditor or a law firm can undo your asset transfers. Such asset transfers could be considered a fraudulent conveyance. When that happens, your transfers get undone. The court might then appoint a receiver to safeguard any other assets from further transfers.

So first, determine if you actually signed a personal guarantee. You may have signed the contract, but not the personal guarantee rider. But look carefully at the merchant cash advance contracts and see if you are a guarantor in some way, regardless of what you understood. Even though an LLC can shield you from the debts and obligations of the business, the personal guarantee you sign is generally unaffected. Signing the contract as a representative of a company is different from signing the contract as the guarantor.

The Actual Intent to Hinder, Delay, or Defraud Creditors

Creditors look for red flags. Under Florida law, any transfer that was made with the actual intent to hinder, delay, or defraud creditors may be undone. The court can consider many factors when making this judgment, such as whether you transferred to an “insider,” such as a spouse or blood relative, up to a third degree. References to Florida law are just an example, because these laws vary between states.

If you are found to have engaged in a fraudulent conveyance, your creditor can get a money judgment against the person who received the asset, called the transferee, up to the lesser of the value of the asset or the creditor’s claim. The creditor can also attach other property of the relative who received the asset. This can happen even if your spouse never signed any personal guarantee.

Your creditor doesn’t have forever to bring an action to challenge your transfer. In Florida, creditors generally have 4 years after the transfer of assets to sue a transferee for fraudulent conveyance, or up to one year after a reasonable discovery, if the discovery was made later. But trying to play a shell game with your assets can cause you a lot of grief and expense. Not all transfers are improper. Common measures of whether a transfer is improper include whether you are shielding yourself from existing creditors, or whether you transferred assets at less than their value and if you received anything of value in return. Look at your financial condition at the time, and the purpose of the transfer.

If you have a property that is pledged as collateral, a secured creditor likely has a special right to get ahold of that property. UCC Article 9 generally holds that a security interest continues to attach to collateral even after it’s transferred to a third party, unless the secured party who took the security interest authorized the transfer. But, as with so many things that have to do with Article 9, there are many exceptions and situations that don’t fit neatly into any prescribed scenario.

Bankruptcy Code

The effect of your transfers gets even more tangled if you file for bankruptcy later. Under the Bankruptcy Code, the bankruptcy trustee can undo transfers you made within two years of filing for bankruptcy if you received less than reasonably equivalent value in exchange for the transfer, and were insolvent at the time of the transfer or became insolvent from the transfer. Something worse may happen. The court must deny you a discharge altogether if it finds that you transferred or concealed property with the intent to hinder, delay, or defraud your creditor within one year of filing for bankruptcy. Knowingly making a fraudulent transfer in contemplation of filing for bankruptcy is also a federal crime, which carries a penalty of up to five years in prison.

Another pitfall is that if you owe the IRS for unpaid income or gift tax, the IRS may try to hold the transferee of your assets liable. The relative who received a gift from you could be liable. The IRS has one additional year beyond your assessment period to assess your transferee.

Assets Are Already Protected from Personal Guarantees

The smarter thing to do is to check what assets are already protected from personal guarantees. Some assets are already shielded from creditors, whether a personal guarantee was signed or not. Knowing what protections exist under the law can save you a lot of grief. Several states have ”homestead exemptions” that protect a portion of the value in your house from creditors. Some states have more protection than others. A homestead exemption may be a huge boon, but think carefully before rushing to pay down your mortgage or change your deed or buy a new trust. Bankruptcy law restricts some attempts at converting nonexempt property into home equity. A living trust is not automatically a shield, because you often have the power to revoke the trust. These are all tricky issues. Know what you are getting into.

Putting your spouse’s name on the house or adding your spouse to the deed as a tenant in common doesn’t automatically protect your real estate from personal guarantees. The type of ownership that makes a difference is called a tenancy by the entirety. In a tenancy by the entirety, under certain circumstances, creditors can’t go after a tenant’s share of property. But not all states allow tenancy by the entirety. Even in states that do, a joint debt might make the whole property liable.

A demand letter itself doesn’t have the force of a court order. If you’re served with a lawsuit, or with a restraining notice or bank levy, get a lawyer immediately and have your papers reviewed. Moving your money into your spouse’s name could make things worse.

At this point, you may feel like throwing up your hands. But take a deep breath. Before moving ahead with any transfers, get the advice of an experienced attorney who knows the law of your state and who can see the whole picture. And keep excellent records. You may need them later. And when negotiating an MCA settlement, make sure the settlement release clears you personally as guarantor, not only the company. If it doesn’t, your creditor can still come after you.