Common Types of Creditors

The United States is an extremely litigious society with result-oriented judges and juries frequently ruling in favor of the creditor plaintiff.  The judgments have the potential to bankrupt both businesses and individuals, the litigation is costly and winning may only amount to a pyrrhic victory.  Therefore, limiting your liability through asset protection planning greatly reduces your personal and business exposure to the many risks associated with living in the United States.  The following is a sample of the different types of creditors likely to be on the other side of the lawsuit:

Tort creditors

CreditorA tort is defined as an act that injures someone in some way, be it economic or physical injury.  This is usually the source of immense liability and has the potential to bankrupt individuals and halt business operations.  In addition, lawsuits are getting more creative and juries are awarding damages for the most trivial of things.  Whether frivolous lawsuits or not, the fact remains that record numbers of claims are filed each year.  In fact, the amount of tort lawsuits filed in this country, together with its high figure damage awards, has sparked calls for tort reform, aimed at reducing the ability of victims to bring a lawsuit and capping awards at damages.  This goes to show you how easy it is to get sued.

Contract Creditors

These creditors result from the non-performance of a promise, obligation or duty arising out of a contract.  In other words, breaching a contract can result in a swath of damages, including consequential, compensatory or reliance damages.  Likewise, defaulting on a loan can trigger an acceleration clause, thus prompting the bank to call for its entire amount.  Failing to pay a financial obligation or perform under a contract is not always purposeful.  Conditions and circumstances as they are, such as a decline in business operations, can lead to breaches and defaults.  Having contracts properly drafted and protecting your business assets through a wealth preservation plan will greatly help in these situations.

“Family” Creditors

Unfortunately, your family can be a major source of liability.  For example, getting a divorce can lead to the equal distribution of your assets, regardless of whether the other spouse actually owned them.  In fact, assets that were owned previous to the marriage can be converted, unbeknownst to you, into assets of the marriage, meaning the other spouse would have a claim against it (or at least an argument for a portion of its value) during the divorce proceedings.  Moreover, the actions of dependents, like children, may lead to liability for the parents.  Your business and personal assets can certainly be subject to claims should a family member, or the actions of a family member, lead to liability.

Internal Creditors

Internal creditors are those that come from within a business.  For example, a business may own investment property or have employees.  Both are liability producing assets that have the potential to put your financial future in jeopardy should problems arise.  Thus, separating your liability producing assets from your non-liability producing assets can help avoid disputes — or the fallout from disputes — arising from the internal operations of the company.

Self-dealing Creditors

These types of creditors are those that deal with the company as if it were their personal bank account.  In other words, directors and officers that self-deal with the company will put both business and personal assets at risk.  Self dealing can include commingling business and personal funds, paying personal expenses with the business’s operating account, or taking certain actions in official capacity that benefit you in a personal capacity. Thus, this will have the effect of converting a personal creditor into both personal and business creditor.

Governmental Creditors

Failing to pay annual fees and observe business formalities can lead to administrative dissolution by the state. In more severe circumstances, your company may be dissolved by the courts.  Dissolution involves winding-up the business and paying off your debts.  However, depending on the business entity, if the debts are not fully paid for, the creditors will look to you personally to satisfy the business’s obligations.  In other cases, failing to file an annual report will lead to administrative dissolution.  It is important to note that once your company is dissolved, your liability protection will dissolve as well.

The above types of creditors, by no means an exclusive list, should serve to show you the ways in which your business and personal assets can become the products of a lawsuit.  Remember, proper asset protecting planning is best done as preventive planning, and the longer you wait the more your options start to wither away.

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