Few people, when swiping their credit cards, or getting a car loan, do so with the intention of defaulting on their debt. In many cases, they are sure they can afford the debt, and that they will be able to make the loan payments. Unfortunately, debt tends to build up, and can sneak up on you. On top of that, what happens if you run into a financial setback that your emergency fund can’t handle?
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At some point, you reach a breaking point, and you start weighing your options. How can you protect your assets as much as possible when you can’t pay your debts and your creditors come knocking? Here are some things you can do to protect your assets as much as possible — and still make sure that bankruptcy is an option if it gets to that point.
No, I’m not saying that you should transfer your assets to someone else. In fact, that’s a big no-no. Transferring assets to someone else, just ahead of a bankruptcy, when you know you can’t pay all your debts, is sometimes known as fraudulent conveyance. It sounds bad — and it is.
You can, though, move your money from a bank where you have loans. If you have a deposit account at the same bank that has issued you a credit card, or where you have some other type of credit line, that bank can seize the money in your deposit account to help pay your debt. As soon as the bank realizes you can’t pay, it is likely to seize what it can. Banks can’t seize federal benefits, or retirement account money, so, by law, they have to leave some money in your account if you are receiving Social Security, disability or survivor benefits.
Instead, open a new account at a bank or credit union where you don’t borrow money, and keep your money there.
You shouldn’t open a new retirement account and pour a bunch of money into it for protection. Again, doing that just ahead of filing for bankruptcy can cause problems for you. However, if you make regular contributions right now, especially through direct deposit from your paycheck, don’t change anything. If you can afford it, just keep going with business as usual for your retirement account. Your fund offered through your employer is 100% protected, and your IRA is protected up to $1 million. Making regular contributions can help you protect some of your money from creditors.
Many people like to build up a tax refund. Realize that, while your credit card issuer isn’t going to lay claim to your tax refund, the IRS can seize it for back taxes and student loan debt. Check your withholding. If you are on track to receive a big refund, reduce what is being withheld so that the government can’t just take the money.
One of the best ways you can avoid being sued for what you owe is to keep in touch with your creditors. The Fair Debt Collection Practices Act protects you from harassment, but that doesn’t mean that you should ignore your creditors. Let them know that you can’t pay right now, and even offer to work out a payment plan with them. In some cases, if you are upfront (after doing what you can to protect your assets), you might be able to settle, or work out a plan for repayment without bankruptcy or lawsuits.
If your creditors file a lawsuit against you, you need help. Be sure you get an attorney who can help you. Choose an attorney that specializes in credit issues. Find out about the statute of limitations for debts in your state, and challenge suits that are legally too old to be sued over. Make sure you show up to court dates. If you aren’t there, you could find yourself with more fees and charges.
When you owe money, creditors are within in their rights to try and get paid. However, you have rights, too. You can protect some of your assets, and work toward an arrangement with your creditors.