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What Is Creditor Protection?

Creditor protection may refer to prohibitions that prevent a creditor from seizing all of a debtor's financial assets.
Life insurance creditor protection provides a creditor with coverage in the event of a debtor's death.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 December 2014
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Creditor protection is a collective term that is used in two different ways. One common use has to do with the various resources that provide debtors with an equitable amount of protection from creditors in the event that the debtor is unable to pay off an existing obligation according to the terms and conditions related to the transaction. The other application of this term has to do with the protection of creditors, in terms of limiting the loss incurred when a debtor defaults on an outstanding debt.

When creditor protection is used to describe laws, procedures, or regulations that are aimed at protecting the debtor from action by the creditor, the term usually refers to prohibitions that keep the creditor from acquiring all the debtor’s financial assets. The idea is to make sure the debtor does retain control of enough income and assets to live what is considered to be a basic standard of living. This prevents the debtor from becoming dependent on the local government for necessities such as food, clothing, and shelter.

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For example, if a debtor should default on a bank loan, the bank has the right to sue for recovery of the outstanding balance. If the creditor is awarded a judgement, then the court will order that funds be withheld from the debtor’s wages in order to settle the debt. Rather than withhold the entire sum of wages each pay period, creditor protection statutes will bind the court to determining the percentage of income that will be withheld and forwarded each pay period to the creditor, until the debt is discharged in full. As a result, the debtor is still left with enough money to cover his or her basic expenses.

In terms of offering protection to creditors, there are also laws and procedures that provide lenders and other types of creditors with courses of action in the event that a debtor cannot or will not honor an outstanding debt. Creditor protection of this type acts to help the creditor maintain his or her business, and not cause any injury to other clients who would be hurt financially if the creditor had to cease operations. At the same time, this type of protection makes sure the creditor is not damaged financially because of the debtor’s default.

There are different forms of protection to creditors. In some cases, line insurance creditor protection provides the creditor with coverage that can be used in the event a debtor should die before the total debt is repaid. This type of insurance creditor protection actually serves the interests of both the creditor and the heirs of the deceased, in that the outstanding debt is settled in full by the insurance provider and does not touch the assets of the estate.

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