How to Survive Judgments, Tax Liens and Lawsuits (Part 1 of 4)
Judgments, tax liens and lawsuits all have one thing in common; those who control them are after your assets. If you don’t have assets the tables are turned and actually lean in your favor. Every day in business is a risk, no different than being in the stock or commodities market. It is a risk for each side and for every winner there is a loser. Somehow the average entrepreneur thinks “there is no way I can fail,” in spite of the statistics quoted by the U.S. Bureau of Labor Statistics sharing that 49.9% of all startups go out of business within the first 5 years.
In Las Vegas there is no rule that says that if you win some money, you are required to “let it ride” every time. You actually can put some to the side and use only part of the winnings to continue to play. This is also true in business life. Certain laws provide access to your assets for creditors and if you have already made a mistake, moving or making an attempt to otherwise hide your assets would be viewed as fraudulent and rightfully so. If, however, you plan ahead for the best case AND the worst-case scenario, that is just good business sense.
Preplanning versus oops - The first thing to do is “circle the wagons” if you are being attacked. Don’t leave assets lying around that can easily be grabbed. Cash sitting in bank accounts is an easy target. You are better off having inventory or paying down your critical expenses for survival such as rent, bank payment or key supplier, then having money sitting in an account. Banks who are generally secured come ahead of everyone, at least until the taxing bodies actually lien.
Personal guarantees have no real value until the day of reckoning. The value of the guarantee can and does change on a daily basis. Until a suit or lien is actually filed, you are spending money or earning money which keeps the value of your guarantee changing constantly. Many entrepreneurs use all of their money to keep their business going when they hit hard times. (A bit crazy when you think about it, like throwing all your valuables into a boat that is leaking water.) However, when the day of reckoning comes and everyone wants to split up those valuables, if there is nothing left you are actually in the best possible position to negotiate settlements.
Although there are exceptions, people without assets shouldn’t be declaring bankruptcy. They have nothing to protect. People with assets will find themselves having those assets liquidated to pay the creditors.
By understanding how creditors think and taking steps to control what they can reach, you give yourself more room to negotiate and recover. Next week, in Part 2, we’ll dive into one of the most effective tools for shielding yourself and your assets: incorporation, and how the right structure can put a strong legal barrier between you and potential threats.
