DEFINITION of 'External Claim'

A claim against an individual that does not arise out of any relationship he or she may have to a business in which the individual has an ownership interest. Depending on how the business is owned, the creditor may be able to pursue the business to satisfy the external claim against the individual business owner/debtor.

BREAKING DOWN 'External Claim'

Simply setting up a business in an entity, such as a corporation, may not protect it from the owner's personal creditors. External claims against a business owner may be satisfied by his or her interest in the business entity.

However, some entities, such as limited partnerships and limited liability companies, provide their partners/members with protection from claims arising outside of the entity. Many states only give outside creditors the right to attach or garnish distributions made from the entity to the debtor and do not allow the creditor to attach or sell the debtor's interest in the entity. Thus, management control of the entity remains intact and the debtor's interest in the entity is protected.

RELATED TERMS
  1. Charging Order

    A court-authorized right granted to a judgment creditor to attach ...
  2. Internal Claim

    A claim by a creditor that is restricted to the business's assets ...
  3. Accounting Entity

    A clearly defined economics unit that is accounted for separately. ...
  4. Preferred Creditor

    An individual or organization that has priority in being paid ...
  5. Judgment Lien

    A court ruling that gives a creditor the right to take possession ...
  6. Collection-Proof

    A debtor who doesn’t have any assets that a creditor can collect ...
Related Articles
  1. Trading

    Asset Protection For The Business Owner

    Could incorporating your business help protect it? Find out here.
  2. Taxes

    What's a Debtor?

    A debtor​ is an individual or company that owes money.
  3. Financial Advisor

    How to Protect Assets from Creditors and Lawsuits

    Proper planning is required to ensure that a client’s assets are truly protected. Here are some strategies that can help shield them from seizure.
  4. Managing Wealth

    Protect Your Assets from Liability in Illinois

    Asset protection is a fundamental part of risk management. Use these tips to protect your assets.
  5. Investing

    Equity Stripping Leaves Creditors Empty-Handed

    Add additional debt to your real estate assets to keep the creditors at bay.
  6. Small Business

    Understanding Limited Liability

    Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.
  7. Small Business

    Which Type of Organization Is Best For Your Business?

    Learn the differences between the types of business organizations so you can determine how to best structure your business for tax and liability limitations.
  8. Small Business

    Alternatives To Business Bankruptcy

    Bankruptcy isn't the only alternative for a struggling business. It can try negotiating with creditors or liquidating assets outside the U.S courts.
  9. Small Business

    Understanding Externality

    An externality is a consequence of an economic activity that is experienced by unrelated third parties.
RELATED FAQS
  1. Do creditors have the same rights in all 50 US states?

    Learn more about the rights of creditors to pursue their debts; how they may vary from state to state and how they are regulated ... Read Answer >>
  2. What are some examples of how corporations manage short-term investments?

    Learn how a business owner can protect against significant liability by forming a corporate entity structure, and understand ... Read Answer >>
  3. In a corporate liquidation, why are unpaid taxes and wages paid before general creditors ...

    The Bankruptcy Code, section 507, states that when a corporation is liquidated, creditors are paid in a particular order: ... Read Answer >>
  4. Can a creditor sue me for a delinquent account?

    Learn what happens when an account is delinquent and read about the regulations that protect consumers who have delinquent ... Read Answer >>
  5. How can companies reduce internal and external business risk?

    Understand the difference between internal business risk and external business risk. Learn how a company can reduce each ... Read Answer >>
Hot Definitions
  1. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  2. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  3. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  4. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
  5. Quasi Contract

    A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A normal ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center