Asset Protection Planning to Avoid the Writ of Garnishment

A writ of garnishment is a court order allowing creditors to “intercept” money before it is paid to a judgment debtor.  A creditor, as you probably already guessed, is a party to whom money is owed. A judgment debtor, on the other hand, is a party who owes money to a creditor after being found liable through the courts.

Setting up entities so as to avoid being garnished is one of the goals of asset protection planning.   In this article, we are going to discuss how entities can be set up so as to avoid garnishment.

The Los Cabos Asset Protection Trust

As an example, let’s revisit the Los Cabos Asset Protection Trust case.  In that case, John Cork set up a trust in the Cook Islands. A family limited partnership—JCSC, LLP—was also part of Mr. Cork’s asset protection plan. The Los Cabos Trust owned 96% of JCSC.

Mr. Cork and his various domestic trusts and business entities were eventually sued over a real estate loan that had fallen into default. The result of that suit was a judgment against Mr. Cork (now a “judgment debtor”).

Once that judgment was obtained, the creditor was given broad access to the financial records of Mr. Cork and his various business entities.  In sifting through that information, the creditor discovered something of interest: Mr. Cork had, as an individual, written checks totaling more than to $2,000,000 to JCSC that appeared in the limited partnership’s records as loans from the Los Cabos Trust.

The creditors immediately applied for a writ of garnishment from the court and argued that it was not the Los Cabos Asset Protection Trust that was entitled to repayment of the loans but Mr. Cork as an individual.   The court issued a writ of garnishment, which allowed the creditor to intercept any money to be paid from JCSC to Mr. Cork.  In essence, the court reasoned that because the loans had come from Mr. Cork’s personal accounts (rather than the trust), and because the trust had been deemed an alter-ego of Mr. Cork, the writ of garnishment was appropriate.

The Effects of Asset Protection Planning

What ultimately happened, i.e. whether the creditor ever collected on the writ of garnishment, is not known.  But one thing is certainly clear: The court has broad and powerful jurisdiction over JCSC.  That’s because JCSC is a domestic business entity and must respect court orders like the writ of garnishment in this case.

The Los Cabos Trust, however, is at no such disadvantage.   It does not have to respect a court order from a U.S. state or federal court, including the writ of garnishment.  If Mr. Cork’s attorneys were well prepared and knowledgeable and if they executed a properly formed plan, there is a good chance that the assets sought by Mr. Cork’s creditors are safely tucked away in an offshore jurisdiction right now.

The point of all this is to help you understand that planning is important but execution is equally as important.   If you are ever served with a complaint, it’s critical that you contact your asset protection attorney immediately so as to trigger and execute your planning to truly protect your assets.