The use of credit allows an individual to purchase a home or grow a business, even when he does not have the financial resources available to do so. At times, an individual may find himself unable to fulfill the terms of his credit contract and may even default on credit payments. In such cases, a creditor has the right to sue the defaulted borrower and obtain a court judgment for the unpaid balance. A judgment might allow a creditor to seize a debtor's personal assets in order to satisfy the debt, but there are laws in place that allow a debtor to protect at least some of his personal assets from creditor claims.
Set up a legal entity to protect your personal assets from your business dealings and vice versa. Form a corporation or limited liability company for the purpose of running a business or conducting business transactions. Many business owners make the mistake of co-signing their business loans and other transactions, indicates Panell Law Firm, LLC. The purpose of a corporation or LLC is to provide legal separation between a company's financial dealings and an individual's financial dealings. Filing a legal corporation or limited liability company through your secretary of state provides automatic protection and separation of your personal assets and business assets, so personal creditors cannot access business assets, and business creditors cannot access personal assets.
Transfer a portion of your financial assets into the name of your spouse or other family member. Although transfer of assets can be risky, and may be scrutinized by a court, some transactions are deemed lawful. A debtor may legally transfer assets to a spouse in order to reduce estate taxes or to even out both partners' estates, notes LaMarca & Landry, P.C. This strategy of asset transfer may not be effective if both partners are subject to creditor claims, however.
Check to see which assets may already be exempt according to your state's laws. Although the laws are designed to ensure that a creditor has the right to collect owed money, there are also laws designed to protect a debtor's rights as well. Most states have a homestead protection law that prevents a creditor from laying claim to a debtor's primary residence, according to Panell Law Firm, LLC. Personal possessions and clothing are typically off-limits to creditors, and there are often restrictions on how much a creditor may garnish your wages or what percentage of personal savings and investment accounts may be levied against a debt. If you are facing creditor claims, you should consult with a specialized attorney who can guide you through the process.
File for bankruptcy if your financial situation is dire. Bankruptcy offers a measure of protection against creditors when you are truly unable to meet your financial obligations. A bankruptcy arrangement may allow you to make scheduled payments to satisfy creditors and eliminate certain debts while maintaining ownership of your personal and business assets. A bankruptcy lawyer will help you determine if filing is the right solution for your personal situation.