If you're sued or declare bankruptcy, creditors could seize your assets quickly. That is why it is crucial to know how to protect your assets and understand which are exempt from seizure.
As an attorney with over 10 years of experience, I know all the ins and outs of asset protection planning. In this article, I'll share everything you need to know about protecting your assets from a lawsuit.
- If you declare bankruptcy or are sued by creditors, they can seize your assets, opening you up to personal liability.
- The majority of individuals who file for bankruptcy do not have non-exempt assets.
- Asset protection can help you keep your property safe from creditors. This will make it more likely that they will agree to a fair settlement instead of taking legal action, which can be expensive.
What Is an Asset?
An asset is any item that can generate positive cash flow, save on costs, or offer future economic benefits. Because assets have monetary value, they improve a company's operations, increase its market value, or raise an individual's net worth .
5 Types of Assets
There are five types of assets that people or companies possess. They are liquid, tangible, fixed, current, and intangible assets .
1. Liquid Assets
A liquid asset is an asset that can be easily converted into cash. The most common liquid assets are checking and savings, money market accounts, short-term bonds, and mutual funds. Other examples of liquid assets include stocks, precious metals, and cryptocurrency.
2. Tangible Assets
Tangible assets are assets that can be seen and touched. They include land, buildings, vehicles, machinery, and equipment.
3. Fixed Assets
Fixed assets are tangible, long-term resources that can be converted to cash and depreciated over time. These assets can't be converted into cash easily but are essential to a company's operations.
4. Current Assets
Current assets are assets that will be converted into cash within one year. They include cash, accounts receivable, inventory, and prepaid expenses.
5. Intangible Assets
Intangible assets, such as copyrights, patents, and goodwill, cannot be touched or held. You can protect these assets by registering them with the appropriate government agency.
Why Do You Need to Protect Assets From Lawsuits?
You need to protect assets from lawsuits because creditors may be able to seize them if you file for bankruptcy or are sued by creditors.
When you file for bankruptcy, your assets become the property of the bankruptcy estate. The trustee can sell your assets to pay off your debts.
If creditors sue you, they may also try to seize your assets. This act is called garnishment. A creditor can garnish your wages or bank account if you owe them money and do not make payments.
Sometimes, the injured person needs a lot of compensation money. In that case, the lawyer will try to get money from the person's personal assets and insurance coverage.
Whatever the reason, it's important to know what assets are exempt and non-exempt to help you protect your finances in the event of a lawsuit.
What are Exempt Assets?
Exempt assets are protected assets. They are assets that cannot be taken away by a court order or creditors to satisfy debts, even if you are sued or declare bankruptcy.
If you have any property that is exempt from creditors, it must be listed on the financial statements and schedules.
This information must be specified by both federal law and state law .
Examples of an exempt asset include:
- Home furnishings
- Retirement accounts
- Individual Retirement Account (IRA)
- Child support and alimony
- Workers' compensation benefits
- Life insurance
- Cash in a checking or savings accounts
What Are Non-Exempt Assets?
Non-exempt assets are unprotected, which means they can be seized and liquidated by creditors in the event of bankruptcy or a lawsuit.
Examples of a non-exempt asset include:
- Non-retirement account investments
- Stocks, bonds, and mutual fund investments
- The money in your bank accounts.
- Valuable collection
- Musical instruments
- Non-primary residences such as vacation homes
"Non-exempt property won't appear in the exemption list. What will happen to your non-exempt property depends on the type of bankruptcy chapter you file."
-Cara O'Neill, Attorney
5 Ways to Keep Your Assets Safe
No one looks forward to the idea of being sued, but it's important to protect your assets just in case. Here are five ways to keep your assets safe from lawsuits:
1. Asset Protection Trusts (APTs)
Some wealthy individuals have long used offshore trusts to keep their assets from being taken away by creditors.
However, creating and maintaining these offshore accounts can be very costly.
Asset protection trusts are affordable and can protect your assets from creditors, lawsuits, and other legal actions.
The trustees manage the assets and distribute them to the beneficiaries according to the terms of the trust.
2. Family Limited Partnerships
A family limited partnership (FLP) is a legal entity created by a family to hold and manage their assets. One or more general partners manage the FLP, and each family member becomes a limited partner with a share of the profits and losses.
3. Limited Liability Companies (LLCs)
A limited liability company (LLC) is a legal business structure that offers personal asset protection. The main advantage of an LLC is that it limits the personal liability of its members for debts.
In most cases, creditors can only go after the LLC's assets, not the members' personal assets.
4. Retirement Accounts
Retirement accounts, such as 401(k)s and IRAs, are protected from creditors in most cases. The Federal Employee Retirement Income Security Act (ERISA) exempts employer-sponsored retirement plans from being seized by creditors.
5. Insurance Policies
Other insurance policies can help protect your assets even if you have adequate insurance.
These include umbrella, malpractice, auto insurance, and life insurance policies.
Talk to your insurance agent to determine which one is best for you and what kind of coverage you need.
You should be aware that no single legal strategy can entirely guarantee your assets' safety.
To safeguard your assets, I recommend using a variety of layers of protection, such as an asset protection trust and an umbrella insurance policy.
See all related product liability lawsuits our lawyers have taken on.
What Is a Claim Against Assets?
A claim against assets is a legal action filed by a creditor that requests that a third party pay for the assets under dispute.
Will a Limited Liability Company Protect My Personal Assets?
Yes, a Limited Liability Company will protect your personal assets because it is a business entity that's legally separate from your personal assets, therefore providing you with personal liability coverage.
What Is a Family Asset Protection Trust?
A family asset protection trust is a special type of living trust that can provide added security for your family by enabling you to leave specific personal property to your children or grandchildren.
What Is Wealth Protection?
Wealth protection is the wealth management method and strategy that assist people, families, and enterprises in safeguarding their financial assets.
How To Sue Someone With No Assets?
To sue someone with no assets, you must look beyond their personal savings and into their insurance policy. Even if they have very little money in the bank, they might be protected by liability insurance such as auto liability insurance.
Can I Protect My Assets After a Lawsuit Is Filed?
No, you can't protect your assets after a lawsuit is filed because a judge might decide that you're trying to commit fraud.
What Are The Different Types of Exemptions?
The different types of exemptions are federal and state exemptions. Federal exemption laws are uniform throughout the United States, but state exemption laws vary significantly based on your state.
Should You Create Asset Protection Plans?
Even if you are financially secure, the first step towards asset protection is to evaluate all of your assets and protect them with an asset protection plan. This way, you will be judgment-proof and prepared for any legal issues that could come up your way.
Contact our lawyers at the Schmidt & Clark, LLP law firm to help you choose the best asset protection plan for your assets and help you preserve your significant assets for future generations.