Loans, loans, and loans – you can’t avoid them these days. Even if you are lucky enough to avoid loans, credit cards never let you escape from the circle of debt. Banks are aggressive in filling up their loan book with ‘performing’ assets, which are payments in your monthly budget. So, home loans, car loans, education loans, personal loans, and collateralized loans are readily available.

All is well when you pay your Equated Monthly Instalments (EMIs) regularly, but everything goes topsy turvy when you fail to pay them. Unfortunately, businesses and entrepreneurs face similar situations when they default on their business loans.

In the case of collateralized loans, banks get the sanction from the court to auction or dispose of the property or security to retrieve the loan. But on the other hand, if the collateral is insufficient to cover the loan, the creditor – Banks or Non-Banking Financial Companies (NBFC) – would pressure you to reimburse the loan soon, or they will approach the court for an attachment order. Moreover, in the event of the borrower’s demise, the creditor can approach the court, causing trouble to the borrower’s family.

Hence, it is essential to understand the investment avenues that are shielded from creditors. These investment avenues are also known as creditor-proof investments. Therefore, a court of law cannot attach these investments, or a creditor cannot auction them to retrieve the loan amount.

A few of the creditor-proof investments include the following:

1. Investment under Irrevocable Trust: Any investment under irrevocable Trust is protected from creditors and court. Since it is an irrevocable trust, an individual can transfer their personal assets to these Trusts, but assets cannot be transferred from the Trusts to an individual. Irrevocable Trust function under the trust deed and in favor of the Trust’s beneficiaries.

A Trust is an independent legal entity, and a court cannot attach it unless the fraudulent motive of a borrower is proved in court. Therefore, creating a Trust requires expert advice from lawyers and chartered accountants.

2. Assigning Life Insurance Policies: Assignment of policies means that rights on the policy are transferred to a lender, a relative, or any person. The policyholder assigning the policy rights is called the assignor, and the person to whom rights have been transferred is called the assignee. Once the assignment of the policy has been transferred from assignor to assignee, then policy holder’s right to the life insurance policy gets canceled. So, the court cannot attach the policy rights of the debtor if they default.

3. The Married Women’s Property Act (MWP): The MWP act came into existence to protect women belonging to any religion or caste from relatives, creditors, and even husbands. Under this act, women can take insurance policies and shield them from attachment by a court. Section 6 of the MWP act allows married men to carry life insurance policies to benefit their wives and children. Married women can take policy under the MWP act and keep their children as nominees. However, even husbands don’t have the right to claim the benefits from those policies.

On top of that, enrolling in insurance policies under the MWP act is very easy. We can do it by filling out an additional form.

4. Public Provident Fund (PPF): PPF is an excellent investment that can give an investor around 7.5% post-tax return. It also qualifies for tax deduction under section 80c. Any withdrawal from the fund is also tax-free. As per the PPF act of 1968, the court cannot attach the fund for payment to the creditor. But, in case of default or fraudulent activities, the income tax authorities can seize it.

5. National Pension Scheme (NPS): As per the Pension Fund Regulatory and Development Authority (PFRDA) act of 2015, NPS under Tier 1 account cannot be attached by the court in case of a default by the pensioner.

6. Professional Indemnity Insurance: This insurance protects professionals and businesses in case of any negligence or error that has brought heavy loss to their clients. Companies or professionals who directly work with customers are suggested to have professional indemnity cover because a customer with evil intentions may also sue the business even if no error, mistake, or negligence has been made by the company.

Credit-proof investments are legitimate ways to protect your hard-earned wealth. However, individuals must avail of these facilities with rightful intention rather than just for protection from creditors.

N.B.: The objective of this article is to bring awareness. It is not meant to encourage anyone to default on their liabilities.

Best Regards

 
Akhil Bhardwaj

Partner

Alpha Capital