Digging Deeper into Debts
Why bother identifying debts and liabilities when searching for assets?
A version of this article was published in Pursuit Magazine in October 2017.
Clients occasionally ask why we spend time researching personal and business debts during the course of a comprehensive asset search, particularly if the objective of the investigation is to identify assets for judgment collection. That’s a good question.
We understand most clients, in most cases, are primarily interested in major assets. Show me the money. That’s the mission. It doesn’t matter if the client’s case pertains to post-judgment collection, probate administration, or financial discovery in divorce. People want to hear good news, and in this situation, that means successfully locating assets with a positive value.
So why focus on debts? Because assets and liabilities are two sides of the same coin in financial investigations. More specifically:
Calculating Net Worth: Determining total debt is necessary for evaluating net worth. Some individuals appear wealthy – with luxury cars and lavish lifestyles – but are badly overextended. Negative financial events such as evictions, foreclosures and collection suits provide critical context for accurately evaluating the economic health of any individual. The same principle applies for corporations. If you fail to investigate liabilities, you won’t know the difference between a billion-dollar company and an impending bankruptcy.
Cleaner Asset, Quicker Collection: When attempting to attach a judgment lien against real property, it is important to know the extent of encumbrances. Preexisting liens generally take precedence over more recent claims, under the basic rule of “first in time, first in right.” For purposes of collection, preference should be given to clean assets where the client’s claim will not compete with tax liens or secured loans, such as mortgages and home equity lines of credit.
Locating Bank Accounts: The disposition of past debts should be explored to identify banking relationships. If the debtor’s accounts were garnished to satisfy a prior judgment, that information should be reflected in the court docket for the original action. Additional court venues will need to be researched if the judgment was also domesticated in other states. Even historical accounts that have been completely depleted may contain leads for locating active assets, particularly if bank statements can be subpoenaed to identify balance transfers made before the accounts were closed.
Peering into Private Trusts: Financially sophisticated individuals seeking to place assets beyond the reach of creditors may transfer ownership of real property to a trust. Trust documents are prepared in private, and rarely disclosed in public records, but that doesn’t mean trusts are perfectly opaque. One manner of identifying participants in a trust is determining who holds the mortgage debt on the property. If the trust refinanced the property, the mortgage deed should bear the name and signature of a trustee. Certain banks require trust beneficiaries to serve as guarantors for any new loans obtained by a trust, and those filings should be reviewable at the offices of the county recorder, county clerk or register of deeds.
About the Author: John Powers is president of Hudson Intelligence, an investigative firm specializing in asset searches and fraud investigations.