Don’t gamble, think again. I am not advocating the non-payment of your personal debts, which would ruin your credit history. I’m saying that today you know exactly which debts you have, but you cannot really factor in that unexpected lawsuit. What I’m saying that with this new understanding, it would be a good idea to begin migrating from the use of personal credit where you’re accepting personal liability for everything you do, to the use of business credit where your corporation accepts liability for all of your worthwhile investments and expenses and borrowing. I’m trying to tell you that you’re standing on the train tracks, jump off now.
Let me describe a possible situation. Someone spent years in college to become a professional in some vocation. He pays all of his bills, saves and invests his money for the future. Like most of us he has customers, business associates, neighbors, friends, relatives, he drives a car and, he meets new people on occasion. What if a neighbor decides to sue him because his dog barks too loud? What if he is sued by envious associates or even worse, dissatisfied customers? Most of us might think that would be okay because we have professional liability insurance and home owners insurance and insurance against unexpected lawsuits? What? You never heard of insurance against unexpected lawsuits?
Normally, you would defend yourself and depend on your attorney to do a good job of it and at the least expense. That way, your insurance carrier would be happy and maybe agree to continue carrying your policy, even if the premiums increase a little. So why would anyone sue anyone else? It’s the principle right? Please, it’s the money, absolutely. Yeah, okay, there is a principal somewhere, but it’s really all about the money they believe that you have and that they can take. You are insured right? You are a professional with a business and/or employment income right? Of course you have money to take, that’s what everyone understands whether you do or not.
But what if you already had a judgment lien against you that this next creditor would have to wait behind, and wait and wait and wait until you decide he didn’t have to wait anymore? Would it matter if you won or lost this unexpected lawsuit? Maybe it would, but maybe not. If it didn’t matter, how much in attorney fees do you think you’d have to pay? Would you need to pay an attorney to defend yourself, to defend your money, if there was no money to take? What kind of insurance rates could you get if you were judgment proof? Have you ever asked what the premiums would cost to insure something that cannot be taken or that has no value?
What would your credit history look like? Let’s say that everyone’s credit history was available for everyone else to see, hypothetically. You pay your bills, never late, have lots of credit, but in order to make yourself judgment proof and save lots of money in potential legal fees and insurance premiums, you have this whopping judgment lien for about a quarter of a million dollars on your credit file as well. How would you explain this if asked? It depends who is asking right? If it’s your close friend who is concerned about your well-being, you might explain that you created this lien as a type of insurance plan against unexpected creditors, to lower your potential expenses of legal fees and possibly even lower your liability insurance premiums. You would explain that the trade-off is a lower personal credit score, but that you don’t really care because now you are using a corporation and its credit history to invest your money and make wise purchases. Would your friend ask who he could talk with to have this done for him?
What if it’s not a friend who is asking, what if it’s another creditor? This creditor could easily see that you are judgment proof, probably with little or no discussion. Why would he go to the expense of trying to sue you?
But what about the house you put in your name before you completed this process? If you sold the house at this point, with that judgment lien, the title company would tell you that at the closing, they would need to pay off that judgment lien and then you could take the balance if there was any money left. So you get the money, but it goes to your corporation. The only problem with this is that you will lose your protection and need to replace that judgment lien. This is only an example of how a liability you do not yet see can develop into something that is very expensive and lasts a long time. You should be able to imagine other variations on this theme.
What about the debts of which you are already aware? What if you reach a point where you either cannot pay or decide that there is no economical benefit for you to continue making payments on your personal debt? How is the creditor paid, or how does the creditor recover, assuming we’re talking about a bank? Let’s continue to examine this in terms of how creditors make their money.
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