Musings About Asset Protection for California Real Estate Investors

I visited with a client of mine yesterday.  He’s about one year into “asset protection mode.”  He has several problem properties teetering on the edge, where the personal guarantees could bankrupt him.   Creditors are circling, but have not yet pounced.  It’s a Kabuki dance, will they or won’t they.  This client wants to be sure if they do pounce, they can’t wipe him out, like they did in the 90’s.

Since I am not an attorney, I can only assume the following that he told me is correct, but I cannot be sure.  This is what I learned.

1.   Get your money out of California bank accounts!  A creditor can walk into a judge the day you default and get a pre-judgment lien on your bank accounts.  Day 1.  A California judge cannot give a creditor such a lien on an account in Wyoming.

2.  Hold your properties in an LLC, preferably an LLC with members not involved in the day-to-day workings of your real estate enterprise. It is much harder for a creditor to get a hold on your assets in an LLC (vs. a corporation or no entity at all).

3.  Be out-of-town on the day of default (so you can’t be served).

4.  Begin squirreling away money into bank accounts that won’t honor a California judgment.  Many foreign jurisdictions, including plenty of ones where it is safe to keep your money,  will not do so.  I knew better than to ask where he was putting his.

5. Pay your federal taxes, file your returns, report your foreign bank accounts and keep on VERY good terms with the IRS.  Chances are, with all the real estate losses floating around, the IRS is not very high on any real estate investor’s creditor list.  The IRS has a worldwide power to collect, unlike the State of CA, and most people are unwilling to stomach the measures necessary to defy that power.

On that cheery note, if you have potential net worth-ending creditor problems and you have not done any bona fide asset protection, you are  a year behind the smart ones who learned their lessons in the 90’s.