What is Creditor-Proofing?
Being an entrepreneur means, inherently, being an optimist – starting a business means it will be successful, right? Well, maybe.
Lawyers are taught to be pessimists so that we can help protect you in a ‘worse-case’ situation. Sadly, that means we assume, when we meet with you, that your business will fail – not because we want it to, but because we can help protect you against the possibility that it might. In the course of that review we discuss with you, amongst other things, ‘creditor-proofing’ – how to protect your assets against the possibility that your business might fail.
There are people to whom you will go for credit, who will ask for a list of your assets and proof that you have the ability to pay the debt if the business fails – banks will often do this. However, many creditors of your business who extend credit to you will not ask for this kind of evidence. That means that, for them, you don’t need to have assets to back up payment of the debt if the business runs into trouble. We can, therefore, have a discussion with you about transferring some of your assets to a spouse, relative, or other person close to you to protect that asset from potential creditors. We can also discuss what assets you might own which are protected from your creditors. The process of transferring assets, or changing assets into forms which are not sizable by creditors, is called ‘creditor-proofing’.
I should clarify that this is not a discussion that can happen when you already have creditors that are owed money – it is often at that point too late to carry out such transfers. However, when a business is first starting out and there are as yet no creditors, that is a perfect time to consider transferring assets to protect them from creditors.