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Have you ever worried about what exactly can be taken from you in a lawsuit? Maybe you’ve recently been sued, or perhaps you’re researching how to proactively protect your assets. Here’s what you should know.
What Assets Are at Risk in a Lawsuit?
All of your assets may be at risk in a lawsuit. Assets include not just real estate, bank accounts and personal property, but also your future earning potential.
If you own a business and your business is being sued, both your personal and business assets could be at risk, depending on how your business is structured and where it is located.
Being structured as a sole proprietorship or general partnership puts your personal assets at risk in a business lawsuit and your business assets at risk in a personal lawsuit. Setting up your business as a limited partnership, limited liability company or corporation can provide better protection by legally separating your business and personal assets.
However, by piercing the corporate veil, business creditors may still be able to seize your personal assets. State law determines how difficult this is to accomplish.
Related: What are assets?
What Assets Can Be Seized?
Bank accounts, real estate, vehicles, boats, jewelry and just about anything of value could be seized by your creditors or an injured party if they win a lawsuit against you. If you don’t have enough tangible assets to satisfy a judgment, you might be forced to turn over a portion of your wages to the person or business who sued you and won until they’ve recouped what a court has determined you owe them.
Other expected (future) assets besides wages can also be seized. These might include commissions, royalties, tax refunds, insurance payouts, stock dividends, stock options and even certain types of trust income. Past assets that you recently transferred to someone else are vulnerable to seizure as well.
“The situations where lawsuits cause people to lose their assets typically involve a scenario where insurance coverage is insufficient and the unprotected assets owned by the defendant are such that a lawyer representing the party suing is incentivized to take a case to trial and obtain a judgment,” said Edward Y. Lee, principal trial attorney with the Law Offices of Edward Y. Lee in Los Angeles. “Unprotected assets are generally lost due to post-judgment collections.”
What Money Is Protected From a Lawsuit?
State law exempts certain property, especially your primary residence, from being claimed by creditors. Exemption laws are “designed to protect consumers and their families from poverty, and to preserve their ability to be productive members of society and to recover and achieve financial rehabilitation,” according to the National Consumer Law Center (NCLC). Which assets are protected and how much protection you have varies by state.
Not one state meets the five standards for protecting family finances from creditors set forth by the NCLC. The best states are Massachusetts and Nevada, while the worst are Georgia, Kentucky, Michigan, New Jersey and Utah.
Check your state’s list of property exempt from the enforcement of money judgments to learn more, but here are a few examples of protections you may have.
Homestead exemptions can prevent creditors from forcing the sale of your home to collect what they’re owed if the exemption is higher than your home equity. If the exemption amount is less than your home equity, the creditor may be able to attach a judgment lien to your home and force a sale. Any surplus equity from the sale after creditor repayment should go to the former homeowner.
Texas’ property code exempts the debtor’s home from most claims unless they are related to mortgage or property tax debt, home improvement and construction work, or the division of property in a divorce. Florida, Iowa, Kansas and Texas have the strongest homestead protections.
Retirement assets may also be protected if they are in a retirement or pension plan governed by a federal law called the Employee Retirement Income Security Act (ERISA). Retirement assets covered by this law include 401(k)s and pension plans.
Individual retirement accounts (IRAs) and other non-ERISA plans have varying levels of protection under state law. Once you take a distribution from a protected retirement account, you may lose creditor protection. However, these protections generally don’t apply when the lawsuit is related to a divorce.
Depending on your state, some or all of the cash value in a life insurance policy you own might be protected. So might annuity income.
Federal and state benefits
Federal benefits paid via direct deposit, such as Social Security and Veterans Administration benefits, are generally protected from debt collection lawsuits, according to the Consumer Financial Protection Bureau.
Social Security doesn’t just include retirement benefits. It also includes survivor’s benefits, spouse and dependent child benefits, supplemental security income and disability income.
Basic transportation and other necessities
You may be able to retain a personal vehicle up to a certain dollar amount. The same goes for household furnishings and appliances, clothing, jewelry and some items necessary to earn a living.
Basic income and deposit account balances
State laws may protect you against destitution by protecting a certain amount of bank account balances from creditors.
Federal law provides some wage protection from creditors. States can implement their own laws that are more protective, but not less protective, than federal law.
A romantic partner’s assets
If you live with someone but aren’t married, their assets generally cannot be seized if you are sued, Lee said. “However, in those states that recognize common law marriage, it is a possibility.”
Protecting Assets After a Lawsuit Has Been Filed
Laws vary by state, but most states allow courts to invalidate certain transfers of money and property that you initiate once a lawsuit has been filed against you, or sometimes even when you’ve been threatened with a lawsuit.
Suppose a creditor is threatening your parents with a lawsuit and you’re wondering if they should transfer their assets to you to avoid the possibility of losing them.
“If a transfer of assets is made to adult children without fair consideration in return in order to avoid payment of a potential debt, the transfer could be considered fraudulent and nullified or expose the transferee to liability,” Lee said.
That’s why it’s important to protect your assets well before there’s even an inkling that someone might sue you. There are several ways to accomplish this, including:
- Homeowners insurance with a high liability limit
- Liability car insurance
- Umbrella insurance to further increase liability protection
- Business insurance
- Irrevocable trusts
“If you’re being sued for a dog bite, a trip-and-fall in your house or even disputes with a neighbor, your homeowners insurance will likely cover it,” says Christa Haggai Ramey, a civil rights, personal injury and trial attorney with Ramey Law P.C. in Los Angeles. “You should always go through your insurance and they will help provide you with the best possible lawyer for what you’re facing.”
If you’re sued for something not covered by insurance, the type of lawyer you should hire depends on the type of dispute.
“If the case involves a business dispute, hire a lawyer who has experience in business litigation and, preferably, the type of business the dispute arose from,” Lee said. “Like doctors, many attorneys practice and specialize in particular areas. As a general rule, it is preferable to have an attorney well-versed in the types of dispute you are involved in.”