External Claim

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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.

INVESTOPEDIA EXPLAINS '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.

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