Thanks to credit cards and easy financial loans, life today have become quite convenient. Whether it is to start a business or take an exotic family vacation, easy to get finance schemes make life [Show More]
Thanks to credit cards and easy financial loans, life today have become quite convenient. Whether it is to start a business or take an exotic family vacation, easy to get finance schemes make life inherently more pleasurable and goals extremely achievable. Having said that, debts and loans are great as long as the repayments are made on time. Things start getting tricky when defaults happen. Defaults can happen for a multitude of reasons, bad financial planning, unforeseen expenses, loss of a job or death of a borrower can lead the lenders to your doorstep to recover their monies or a suitable amount of your assets in lieu. For entrepreneurs and professionals, the risk of litigations that can impact their personal investments is an inconvenient reality. While in some cases indemnity insurance can come to the rescue of professionals if such a situation arises, businessmen have no such fall back. However, there are some creditor proof instruments that can protect you, your business and family from complete financial distress. We take a look at some of these instruments in this blog.
Public Provident Fund
A PPF is an investment that most of us make during financial planning. Not only is it great to generate good, tax-free returns, this investment is also protected against attachment by the court and thus protects the investor from monetary liabilities. The PPF Act 1968 clearly states that "The amount standing to the credit of any subscriber in the fund shall not be liable to attachment under any decree or order of any court in respect of any debtor liability incurred by the subscriber." For business people who depend on borrowing, considering to open PPF accounts for all family members thus is a good idea. Though the PPF has a lock-in period of 15 years, the restrictions on withdrawal are relatively lesser. This gives the insurer the choice to use the PPF money to repay debts and also to keep something aside for those rainy days.
New Pension Scheme
The New Pension Scheme, or NPS, as it is more popularly known, falls under the supervision of Pension Fund Regulatory Authority of India (PFRDA). It has a cost-effective investment structure, clear tax benefits and restriction from court attachments. Since the NPS is a pension like product, the PFRDA states that "No pension or accumulated pension wealth in TIER 1 account under national pension system, shall be liable to seizure, attachment or sequestration by process of any court at the instance of creditor for any demand against the subscriber, or in the satisfaction of a decree or order of any court." However, the NPS has certain regulations regarding withdrawal before and after 60 years of age.
Married Women Properties Act
We all purchase life insurance policies to ensure that our loved ones are taken care of financially in the event of death. However, insurance policies can be attached by the court for a creditor to recover dues unless the life insurance policy has been purchased under the Married Women Properties Act (MWPA). Section 6 of this act allows the insured to create a trust in the name of his/her beneficiaries. By doing so the proceeds from the policy in the event of maturity, surrender or death can be leveraged by the beneficiaries and cannot be claimed by the creditor. While life insurance term plans are the ones that are generally purchased under this act, some other policies such as ULIP and endowment policies too can be bought under it. While all financial advisors strongly believe that investments and insurance should be completely separate from one another, few investments can be made under this structure to protect assets and also help the investments grow securely.
Trusts
Internationally, trust funds are widely used to protect assets from creditors. Financial planning experts recommend moving personal assets to a trust since a trust is a separate entity and as such, cannot be attached by the court. By moving personal assets to a private trust, individual maintains limited control over his/her trust. This ensures that the creditors cannot consider the trust and the debtor as one and the same and hence cannot leverage this fund to recover their debt. It has to be taken into consideration that once assets are moved to a trust it is irreversible. Hence, utmost caution must be taken when implementing this.
While these are all legal ways to protect assets, we need to understand that these must be approached with the right intentions. Asset protection planning should always be done before a claim arises and should be made with the presumption that the purpose of the same will eventually be known to the creditors. Asset protection plans that require secrecy, are done with an illegal intention and are not disclosed in full can actually be termed fraudulent. In such a case, nothing that a debtor does can protect him or his assets from getting attached. Approach your financial planning with maturity and clarity to make sure that you not only stay in the right side of the law but also to ensure that the law is there to help you when you need it the most
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