The best offense is frequently a good defense. No matter how astute a business person you are, or how skilled you are as an investor, or how lucky you are with your lottery tickets, it does little good if you leave your assets hanging like a slab of meat in the water for trial lawyers to sink their teeth into.
Let’s face it: America is growing increasingly litigious, and the more assets people think you have, the more tempting a target you will become for frivolous lawsuits.
If you are a business professional or if you own a business, you could be hit by any of the following:
- Trademark Infringement Lawsuits. You might think you’re just parodying a well-known song, or you could think it’s no big deal to paint Disney characters on the wall at the daycare center you own and operate. The original trademark owner may disagree – and sue for damages.
- Sexual Harassment Accusations. Just because you think the lawsuit is without merit doesn’t mean the plaintiff won’t go forward with the case.
- Employment Discrimination. Again, a lawsuit could be justified or unjustified. A well-meaning hiring manager could expose you to a discrimination suit just by asking a pregnant applicant, “When’s the baby due?” You’ll also need to be careful to fire an employee legally.
- Faulty Products. You could manufacture a chair, and someone could hurt his back when it collapses underneath him. Courts may find you liable for damages.
- Malpractice Claims. These aren’t just for doctors and lawyers. A financial advisor could be accused of selling an unsuitable investment and be held personally liable.
- Breach of Contract Claims. If you are doing business under the terms of a contract and fail to live up to those terms, the counterparty could be economically damaged by your failure. Whether intentional, unintentional, or due to negligence, a jury could hold you responsible.
- Work-related Vehicle Accidents. You own a pizzeria. Your driver runs over a pedestrian while delivering a pizza on your behalf. He’s at fault – but you’re the one with the deep pockets. The victim’s lawyers will come after you or your insurance company.
- Workers’ Compensation Incidents. The same employee comes back to work the next day…and slices off his finger while cutting a pie. You, again, are on the hook to pay for treatment and rehabilitation, although workers compensation insurance laws generally require you to carry insurance to protect both your business and your worker.
- “Slip-and-Fall” Accidents. The same employee gets his finger patched up and comes back to work. He mops the dining room floor. A customer slips and falls, and breaks her hip. Again, her attorneys may target you as the liable party, and come after you and your business.
Your business isn’t the only source of potential liability. Consider the following possibilities:
- Divorce. Divorce can pose a major threat to your finances for a number of reasons. First of all, your former spouse likely has more detailed knowledge of your total finances than most creditors. Unlike other creditors, your spouse can break up a retirement plan under a QDRO (qualified domestic relations order) obtained through the courts, and furthermore, you cannot discharge alimony or back child support debt in bankruptcy, and unpaid alimony has priority over your heirs in probate courts. Finally, unlike your other creditors, your former spouse can potentially have you thrown in jail for failure to pay child support. Another difficult circumstance arises when a former spouse is awarded a number of shares in a corporation you own with him or her. In this case, your ex will have full access to your books, and is entitled to a dividend whenever you pull money out of the corporation for yourself – despite no longer contributing anything of value to the business. To guard against this potential situation, consider a prenuptial agreement or other buy-sell agreement to ensure both parties can be satisfied, and the business unencumbered.
- Auto Accidents. You don’t have to be the one in a wreck to be held liable. For instance, say your uninsured or under-insured teenager causes a wreck – even if your teen is insured, you could be liable if your car insurance isn’t adequate. Check your own coverage to be sure it’s sufficient as well. Your state will have minimum liability requirements, but with today’s juries, awards of multimillion dollars are not outside the realm of possibility.
- Social Host Liability. This applies if you have a party, serve alcohol, and a guest causes an accident or injury after leaving. Alternatively, your kids could have a party while you’re out of town, drink a few beers out on your deck, and expose you to the liability, even though you weren’t even in the same state at the time.
- Vicarious Liability. If your business partner or employee gets in a wreck, yes, you could be sued.
- Employee Actions. If your employee causes damage, it could result in a liability to the company. That liability could attach to you personally as well if you don’t take specific steps to protect your personal assets from business debts.
- Debt. This occurs if you lose your job and default on debts, leading to eventual bankruptcy.
- Medical Issues. If you have a serious medical issue and can’t pay your bills, you could be liable. After all, if you can’t work for a period of time, you will lose some or all of your income, even if you have disability income insurance in place. Even if you have good coverage, you could take a hit from uncovered expenses, such as coinsurance, again leading to bankruptcy.
- A Callable Loan. In some cases, lenders reserve the right to “call” a loan, demanding immediate repayment. This means you will either have to quickly refinance the debt (if you have the means) or sell the asset to raise the cash. If you can’t do either, bankruptcy could be the result.
- Foreclosure. If you fall behind on your mortgage payments, the bank could seize the property in a process called foreclosure. Federal law limits liability from debt secured by your personal residence. However, there are no such restrictions on commercial loans, and a commercial foreclosure could put other assets at risk, unless you take steps in advance to contain the risk.