One of the most common questions attorneys receive is some variation of “I’ve been sued, so how do I protect my assets?” The honest answer is that your options are severely limited once litigation has commenced. Transferring assets after a claim arises constitutes a fraudulent transfer under the Uniform Voidable Transactions Act, which has been adopted in some form by nearly every state. Courts can reverse such transfers and may impose additional penalties on top of the underlying judgment. This article explains the legal reality of attempting asset protection after a lawsuit is filed and what limited options may still exist.
Fraudulent Transfer Law Basics
The Uniform Voidable Transactions Act, formerly known as the Uniform Fraudulent Transfer Act, provides the legal framework that governs asset transfers made to avoid creditors. This legislation allows creditors to “avoid” or reverse transfers that were made to hinder, delay, or defraud them.
The law recognizes two types of fraudulent transfers. The first is actual fraud, where a transfer is made with the intent to hinder, delay, or defraud any creditor. The second is constructive fraud, where a transfer is made for less than reasonably equivalent value while the debtor is insolvent or becomes insolvent as a result of the transfer.
Courts look for what are called “badges of fraud” when evaluating whether a transfer was fraudulent. These are circumstantial indicators of intent codified in the UVTA. They include transfers made to an insider such as a family member or related entity, retention of possession or control after the transfer, transfers made after a lawsuit has been filed or threatened, transfers of substantially all assets, insolvency at the time of transfer or as a result of the transfer, concealment of the transfer, and removal of assets from the jurisdiction. The critical point here is that a transfer made after a lawsuit is filed is itself a badge of fraud under the statute.
Why Transfers After a Lawsuit Are Almost Always Fraudulent
The timing of a transfer is perhaps the most important factor courts consider. A lawsuit represents a “known claim,” and transfers made after a known claim arises are presumptively fraudulent. When someone moves assets after being served with a complaint, the badge of fraud for transfers made after litigation is directly applicable. Combined with other common badges such as transferring assets to family members or retaining control over the transferred property, creditors can build a strong case for reversal.
Courts are highly skeptical of transfers made after litigation begins because the purpose of fraudulent transfer law is to prevent exactly this behavior. Even transfers that might otherwise be legitimate become suspect when made in the shadow of a lawsuit. Some states with domestic asset protection trust statutes require creditors to prove fraud by “clear and convincing” evidence rather than a mere preponderance. However, this higher standard provides little help when the transfer occurs after a lawsuit has been filed. The timing itself serves as powerful evidence of fraudulent intent.
Federal Bankruptcy Considerations
Even if state law might offer some protection, federal bankruptcy law creates additional exposure. Under 11 U.S.C. §548(e), transfers to self-settled trusts can be avoided if made within ten years of a bankruptcy filing. This means that even if a state’s domestic asset protection trust statute has a shorter waiting period, federal law applies if the debtor ends up in bankruptcy court.
The practical impact is significant. If bankruptcy is a possibility within ten years of a transfer, a bankruptcy trustee can potentially reach assets that were transferred to a DAPT. Post-lawsuit transfers to any trust structure remain vulnerable under this extended federal lookback period.
What Creditors Can Do
Creditors have several remedies available when a debtor attempts to transfer assets after litigation begins. They can file an avoidance action seeking to reverse the fraudulent transfer. If successful, the transfer is undone and the assets become available to satisfy the judgment.
Creditors can also pursue remedies against the person or entity that received the transferred assets. They can recover the property directly, or if the property is no longer available, they can obtain a money judgment for its value. Subsequent transferees may also be liable unless they paid fair value in good faith without knowledge of the fraudulent transfer.
Additionally, if a debtor transfers assets in violation of a court order, the court can hold them in contempt. A contempt citation can result in monetary penalties or even jail time. Some courts also impose sanctions for fraudulent transfers made during litigation, which can affect the outcome of the underlying lawsuit.
Limited Options That May Exist
After a lawsuit is filed, there are still some legitimate steps a defendant can take. If funds are available, maximizing contributions to exempt assets may provide some protection. This might include ongoing contributions to retirement accounts or paying down a mortgage on a homestead in states with strong homestead exemptions. However, large or unusual contributions may themselves be challenged as fraudulent transfers.
Reviewing insurance coverage is essential. Ensuring that the insurance company is properly defending the claim and understanding policy limits and exclusions should be a priority. Insurance is often the primary protection available once litigation has commenced.
Understanding your state’s wage exemption rules can also help protect future income. Some states protect wages from garnishment up to certain amounts, providing a baseline of ongoing protection.
Often, the most practical option is negotiating a settlement. Settlement may cost less than fighting both the underlying lawsuit and the fraudulent transfer claims that would follow any attempted asset movement.
What you cannot do after a lawsuit is filed includes transferring assets to family members, LLCs, or trusts with the expectation of protection. Retitling assets to remove them from your name, creating paper transactions to make assets appear to belong to others, or establishing a DAPT and expecting it to shield assets from an existing claim will not work and will likely make your situation worse.
The Lesson: Plan Before You Need It
The consistent theme in asset protection is that timing matters. Protection must be established before claims arise. Once you are aware of a potential claim, it may already be too late. The waiting periods built into DAPT statutes exist precisely to ensure that asset protection planning happens during calm waters rather than in response to a storm.
The right time to plan is when you have no claims or potential claims on the horizon, when you are solvent and can document that solvency, before entering a high-liability profession or business venture, and before the risk event that creates a claim. As the saying goes, the best time to establish asset protection is when you do not need it. If you wait until you need it, it is too late.
Conclusion
Asset protection after a lawsuit is filed is severely limited because transfers made to avoid known creditors are fraudulent under the Uniform Voidable Transactions Act. Courts routinely reverse such transfers, leaving assets exposed to judgment creditors. The time for asset protection planning is before claims arise, not after. If you are not currently facing claims, now is the time to consider your options. For guidance on Wyoming asset protection trusts and proper planning, consider consulting Mark Pierce and Matt Meuli at Wyoming Asset Protection Attorney.