The Debtor-Creditor Relationship

April 13, 2006

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The world's economy is dependent on millions, perhaps billions, of debtor-creditor relationships. At every level, goods and services are provided in exchange for a promise, explicit or implicit, to pay for those goods and services.

Almost every individual and business in America either owes money or is owed money, or both. It is these debtor-creditor relationships that make it essential to protect assets from creditors who would seize them to satisfy debts.

Debtor-creditor relationships are created in one of two ways:

Voluntarily. Examples include loans of all types, credit lines and the use of credit cards. When a person purchases a car and finances the cost, the purchaser is voluntarily incurring debt. The same is true when a credit card is used to purchase goods or services; the purchaser is voluntarily creating a debt to the credit card company by using the card to make the purchase.
In fact, when a person goes into a restaurant and orders dinner, a debt is created because the food is prepared and served by the restaurant in exchange for the diner's implicit promise to pay for it. Both a dinner out and a mortgage on a house create a debt-but the debt to the restaurant is paid immediately. The mortgage, however, illustrates why asset protection is so important. If the payments aren't made, the creditor can often force the sale of the house to satisfy the mortgage debt.
Involuntarily. If the employee of a small business is at fault in a traffic accident and injures someone, the business can be required to compensate the injured person. Similarly, if a house painter applies the wrong paint, or damages the carpets, a debt is created. The homeowner may insist that the painter correct the problem or provide compensation for the damage. Involuntary debt is the hidden risk to assets that can't be avoided. The impact of that risk, however, can be minimized.

How does a creditor obtain an interest in a debtor's property? These interests are referred to as liens against the property in question.