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What’s an Inside Creditor?

 

By: Barry E. Haimo, Esq.
April 14, 2016

inside creditor

 

What’s an Inside Creditor?

When you’ve worked hard for something, you will do anything to protect it. You don’t want your assets or your business vulnerable to creditors, but how do you protect them?

Well, the first step is to check out Asset Protection Planning 101 – Build Your Financial Fortress. After you read that, you might have a better idea of what you’re looking to do. Then, it’s imperative that you find the right attorney who will be able to properly assist you in creating the most appropriate business and asset protection plan for your unique needs. It’s an ongoing relationship with your chosen attorney, not a one-and-done single transaction.

But in order to understand how a business plan can even help you in the first place, you need to understand what a creditor is and then, more specifically, inside and outside creditors.

Do I Have a Creditor?

A creditor is a person or entity to whom you owe money or property. If you have a creditor, that makes you a debtor, or someone who owes a debt.

Who can be a creditor? Here are a few examples.

  • There are creditors who loan you money or extend you credit for a purpose such as buying a house or starting a business.
  • There are creditors who appear when legally significant events occur. For example, if an individual passes away, the deceased’s creditors will generally file claims against his or her estate in order to recover and settle the debt.
  • There are creditors who arise when you default on a contract or when you have a judgment against you for committing a tort, which is a civil wrong.
  • If you are renting an apartment and fail to make your monthly rent payments or damage the property, requiring the landlord to repair the damages, then the landlord can become a creditor to recover rent owed and the cost of repairs.
  • If you get into a car accident which causes injury to another person due to your negligent driving, then the injured person can also become a creditor if they win a lawsuit against you. Please note that insurance may cover the resulting damages, but it may not cover all of them.
  • A former spouse seeking child support payments or alimony payments is also considered a creditor.

Basically, if you owe something to someone or some entity, then you have a creditor. But all of these creditors fall into one of two categories: inside and outside creditors.

For more information about the basics of creditors, read our previous post here.

Inside vs. Outside Creditors

Inside creditors are creditors of a business or a particular entity, such as a trust. The entity itself is responsible for becoming a debtor, such as breaching a contract or committing a tort. The creditor’s recovery is generally limited to the business entity’s assets that are owned and operated by that entity. Otherwise, the creditor doesn’t have many other options when filing a claim.

It is possible to protect against inside creditors by using a business entity such as a corporation or limited liability company (LLC). It also pays to have insurance. The benefits of using entities (with asset protection benefits) to begin with is to insulate and isolate assets and their corresponding potential liabilities from each other (as well as the owners).

Outside creditors are creditors of you personally, as an owner of the business and typically unrelated to the business. This is the type of creditor that comes about in the car accident, tort, and breach of contract situations mentioned above. In these cases, the creditor can go after you personally, which means attacking your personal assets. If you have not engaged in asset protection planning, you and all of your assets will be exposed.

To overcome this vulnerability, contact an experienced estate and business attorney to come up with an effective asset protection strategy. Insulating and isolating your personal assets can make all the difference when it comes to creditors and keeping your loved ones safe from financial devastation.

Author:
Barry E. Haimo, Esq.
Haimo Law
Email: barry@haimolaw.com
LinkedIn: http://www.linkedin.com/in/bhaimo
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Originally posted 2016-04-14 13:30:52.

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