Creditor Proof Instruments

Loans and debt are now part of a consumer’s life. And why not? It has made life convenient while buying goods. A person gets discounts using credit cards; there are reward points, and sometimes zero per cent finance schemes that can help in managing the repayment effectively.

Even big-ticket items such as property and car are now easily bought because of the easy finance schemes.

Debt, however, also brings along an equal quantum of responsibility along with it. Things are good until repayments are regular. If a person starts defaulting or if the borrower dies, the lenders arrive at the doorstep and they have the power to attach assets to recover their dues.

For those who run their own firm and have secured a loan against personal or business assets, things can get tougher. Businesspersons and professionals work under risk of litigations, which endangers their personal investments. Professionals can sometimes mitigate such risks by buying professional indemnity insurances, but there’s no such product available for businesspersons.

But there are instruments which can protect your family in such situations. These products cannot be attached by any court. But be sure that whatever you do, it should be proactive and not reactive. This means, all measures to protect the assets should be done before creditors come knocking at the door and even before the liability arises, otherwise your arrangement can be termed as fraudulent and can be attached.

Public Provident Fund

This is not new to investors. In fact, this is among the first few investments that individuals make in their financial life. Along with generating safe and tax-free returns, Public Provident Fund (PPF) account has protection against attachment.

According to the PPF Act 1968, “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.”

Besides tax saving, PPF also offers an attractive benefit for those who want to be protected from monetary liabilities. All business persons whose business operates on borrowing should consider opening PPF account in the name of all family members.

Do invest only after understanding the product for PPF has 15-year lock-in and also has few restrictions on withdrawal.

New Pension Scheme

Popularly called as NPS, the scheme is slowly gaining popularity among investors. Indian Government is trying hard to convince people to start planning their retirement through this cost effective instrument. In financial year 2015-16, NPS has gained attention as it offers additional deduction of Rs 50,000 under section 80CCD(1b). This is in addition to Rs 1.5 lakh in section 80C.

NPS comes with different asset allocation schemes, being managed by professional fund managers under the regulatory supervision of Pension Fund Regulatory Authority of India (PFRDA). Investor can gain exposure to equity and debt both through this instrument.

Besides the cost-effective investments structure, regulatory supervision and tax benefits, NPS also restricts court attachment. As per the PFRDA (Exits and Withdrawals under NPS) Regulations 2015, “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.”

This pension product like PPF comes with restrictions on withdrawal before and after 60 years of age. Understand the minor nuances of the investments before you opt for it.

Married Women Properties Act

If a creditor demands recovery of dues through court, insurance policies are also entitled to be attached. To protect policies from creditors and to the intended beneficiary is get the claim in case of the insured’s death; individuals should buy life insurance policy under Married Women Properties Act (MWPA).

Section 6 of the MWPA allows individual to buy Insurance policy in his name and create a trust in favour of beneficiaries (wife and children). No separate trust is required to be formed under Indian Trust Act. If done so then the maturity, surrender or death proceeds out of the policy will be the property of the beneficiaries and no creditor of the policyholder can claim anything.

Though it is advisable to buy only term life insurance to cover death risk, but technically even ULIP and endowment policies can be bought under MWP Act. Investments and Insurance should not be mixed, but when the purpose is to protect the asset along with growth on investments, then some investments can be made in this structure.

Trust

Internationally, this structure is widely used. The belief is that business assets are for business entities but personal assets are for trust. One should always keep business and personal assets separate, and that too in such a manner that neither the person loses control over his assets and nor there’s so much control that creditors argue that debtor and the protection structure are one and the same.

Creating a private trust and transferring your personal assets into that can be a good asset protection structure. Trust becomes a separate entity and it can’t be attached by court unless it is proved that this is created to defraud creditors. It should be created with caution and understanding of pros and cons, since once assets are transferred to it, they cannot be taken back.

These are legal ways to protect personal assets, but still if there’s something is done with fraudulent or illegal intention, no product or structure can protect the debtor. So if intention is right, then start early, understand the structure, create a financial plan and start working on it.

This article written by me was originally published in Business Standard