Things to Consider if You Have Been Sued or had a Judgment Rendered Against You
Being served with a lawsuit can be one of your life’s most stressful experiences. This week we outline some steps to take and things to consider if you’ve been sued or if you’ve had a judgment rendered against you
After you receive a petition filed against you, you usually have to file a response by the first Monday after 20 days of receipt. Your response should depend on a number of factors, including if you have any claims against the party filing the lawsuit, if the lawsuit was filed in the proper county and court, and what your defenses are to the claims asserted.
If you do not file a response at all, a default judgment may be rendered against you giving the Plaintiff everything they asked for in their petition. In order to get a default judgment, the Plaintiff must file a motion for default judgment and have a hearing on the motion. If you file a response before that hearing, the default judgment will not be rendered. Keep in mind that the Plaintiff has no duty to give you notice of this hearing if you have not filed an initial response.
Once a default judgment has been rendered, the Plaintiff may exercise that judgment against you. While judgments can even be enforced against your estate if you die, there are a number of ways in which you can protect your assets from creditors
Entity or Trust Protection
Creditors cannot take assets that do not belong to you. If assets are held by an irrevocable trust, there may be spendthrift provisions in the trust agreement that prevent trust property from creditors. If the assets are held by a corporation, or any other entity, the creditor cannot reach them simply by getting a judgment against you personally. However, a Limited Liability Company (LLC) or a Limited Partnership (LP) provides better protection from creditors than a corporation. If you are a single shareholder of a corporation, the creditor can wrestle control of the corporation away from you by judicial means. Texas statues give a higher level of protection to the interests in an LLC and a LP. The Texas statutes basically poison LLC and LP interest against a creditor trying to take the assets in such an entity.
While creditors cannot take assets that do not belong to you, there are laws in place to keep you from transferring your assets in order to avoid creditors. Texas has adopted the Texas Uniform Fraudulent Transfer Act (TUFTA). The statute specifies that transfers of assets are fraudulent as to present and future creditors if the debtor made the transfer:
(1) with actual intent to hinder, delay, or defraud, or
(2) without receiving a reasonably equivalent value in exchange for the transfer and the debtor:
(A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.
In determining actual intent under this statute, consideration may be given, among other factors, to whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor's assets;
(6) the debtor fled;
(7) the debtor removed or concealed assets;
(8) the value of the payment received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
If TUFTA is violated, the statute provides substantial remedies for creditors, including:
(1) voiding the transfer
(2) an attachment against the asset transferred
(3) granting of an injunction against any further transfers
(4) granting of additional attorney fees to that are equitable and just.
Texas is a “community property” state. This means that all property acquired by a husband or a wife during marriage, unless acquired by gift or inheritance, regardless of who actually earned the money, whose name is on the account, or whose name is on the title, is owned one-half by the husband and one-half by the wife. Anything not meeting the definition of community property is considered “separate property.” Creditors can reach the community property of either spouse. However, they cannot reach the separate property of a spouse for the liabilities of the other spouse.
In Texas, spouses have the right to enter into a partition agreement to divide their community property into separate property shares, and dictate that any future income derived from separate property remain separate property. This way, creditors cannot reach any community property assets. However, if the partition agreement is made with the intent to defraud existing creditors, the agreement is void.
Generally, a person’s homestead is protected from creditors save a few exceptions. Homestead is defined as not more than 10 acres of land in a city, town, or village, or not more than 200 acres in a rural setting. However, if a person ceases to use a property as a home and does not intend to use it as a home again, the homestead protection can be lost.
Exempt Personal Property
Generally, up to $60,000 worth of personal property for a family and $30,000 worth of personal property for a single adult are protected from creditors. In addition to these general limits, Texas statutes also protect:
(1) wages (except under court ordered child support payments)
(2) prescribed health aids, and
(3) alimony, support or maintenance received for the support of the debtor or debtor’s dependents
Additionally, burial plots, retirement accounts such as IRAs and 401ks, college savings plans and most life insurance policies are exempt from the reach of creditors.