Legal Tip 260: Impecuniosity as an Asset Protection bargaining tool

When you are impecunious you have no assets. When things go wrong you can use this as your bargaining tool. Bankrupting you will result in costs for the other side but they will end up with nothing to show for it.


Example

Bart has nothing to his name. He borrows some money from his dad and borrows to buy in a mining down. The $1mil property is soon worth $300,000. Bart stops paying the loan and the bank chases him. They sell the property and the mortgage insurer comes after Bart for the $500,000 short fall.

Bart can now negotiate. He can say and show that he has no money or assets and that they can bankrupt him if they want, or he can borrow $20k from his dad and give it to them in full and final settlement on the condition that there are no adverse notations on this credit report.

The creditor (mortgage insurance company) will think $20k is better than nothing but lets try and squeeze him more. Bart replies that he needs to settle this before Friday next week as he is moving to Brazil and that he cannot come up with any more money. The creditor is more likely to except. They could bankrupt him, but couldn’t do it before Friday next week and even if they did it is unlikely they would get any money out of him. So they might accept the $20k.


Now compare this to a person who has lots of assets

Example 2

Homer lent his son Bart deposit money to buy a property in a mining town and he wanted to get in on the action too so he also purchased a property nearby. He borrowed 80% secured by the new property to purchase it and he still owes $800,000 on a $300,000 property. That is a $500k shortfall. He sees his son negotiating with the lender, so he does too. He offers them $300,000 to call it quits. The lender does a search and finds 10 properties in Homer’s name, they do some google searches and estimate he has $2mil in equity.

Guess what they are going to say to his offer?

No. We want the full $500,000 you owe us, actually it is $523,034 now because of interest and legal fees and you have 28 days to pay before we start bankruptcy proceedings.

 

Impecunious, what a great word.

It's like a concatenated version of "Go forth and multiply".

 

I didn't know what it meant until after I started working as a lawyer. Now when it is my turn to shout I just say 'sorry I can't, I am impercunious'.

 

I had to look up what that word means too, nice word!
The fact is that as things stand, the equity in the properties is open to an attack from creditors – anyone preying upon can easily run Land Titles searches and will know what real estate they own. Obviously having equity sitting in ones holdings mean we don’t want this to be a “sitting duck” for creditors. We therefore need to protect that equity.
With the asset protection side of things, one other solution would be to set up the asset protection trust and its bank account now and prepare caveats to be on the 10 titles or so to afford protection of that equity which is currently exposed.

 

I thought it was a mental illness. Phew, I feel better now.

 

Your Honour, my client Datto has been suffering chronic impecuniousosity and as such wishes to plead not guilty.

 

Pecunia
comes from latin meaning consideration or wealth.

 

Um, but isn't your Commodore an asset?

 

lol. It's not exactly my commodore.

You know how pensioners get a discount on their rego. Well, 'ol Mrs Santamaria from up the road was kind enough to register my VT in her name.

Of course, in return of the favour, I occasionally take her to the shops and also to Rookwood where the dear old widow pays her respect while I burn around the track there lol.

 

Yesem...youse honor....Datto...aka the King of the Druie is guilty....let 'ang 'im igh I say guv...

 

There is unrecognised, until now, genius in this.

I feel a Rookwood 500 in the making, or at the very least Ken Block doing a Hoonigan Hearse episode....

 

I haven't heard of this before, what would the caveatable interest in the properties be for the new trust? Is it like a gift and loan back scenario?

 

A trustee cannot just lodge a caveat, it does have to have a caveatable interest which could be due to having lent money under an equitable mortgage

 

Yes as Terry explained. It was the service provider who did this for me (paid for her services who specialises in doing this). I did setup the trust and opened the account but still need to lodge the caveats via the provider. I am just slow and I am refinancing now too, so will need to do that after.

 

I hope you actually made the gift that you borrowed back or this won't work.

 

Terry beats me I am not the legal expert.
It's a trust that is works to protect excess equity from properties or any assets, equitable mortgage. So legitimately “parking” wealth in the trust and so long as all trust income is distributed to beneficiaries before the end of the financial year, the trust is free from tax liabilities and the trustee is not trading or doing anything active to create exposure to risks.
All excess equity or anything of value is allocated there.
I think that's how I understand it.
Something along the lines of:
What we want to do is in effect to mortgage your equity to a trust and that trust will then register a caveat on the title to your properties to represent that mortgaged interest. The caveat (noting the mortgage) will sit there compounding interest and will soak up all remaining equity so that there is nothing else for any creditors to take.
For asset protection the process involves mortgaging the equity in the properties to the trust.
As with a commercial line of credit with a bank that increases and decreases, so will this mortgage go up and down at your discretion. The result is that anyone looking at your equity as an avenue of claiming a debt from you will find it impossible to recover.
I understand the concept cannot explain it though, hence why you are a lawyer and I am not. Hence why I use lawyers for many dealings.

 

The question you should be asking how did you make the gift to the trust that you borrowed back?

Did you just shuffle some papers? Or did you physically transfer money? A gift without transfer is unperfected and will fail - it is just a promise.

I might write a tip on this.

 

Legal Tip 287: Gifts with No Transfer Do Not Work: Asset Protection