How liability and creditor laws work

This guide explains the rules that decide what creditors can reach. It does not describe strategies for any particular person or business.

Insurance

General liability, professional liability, property, commercial auto, and umbrella policies pay covered claims up to their limits. Policies differ in what they cover and exclude. The Department of Insurance publishes consumer and small business guides.

Entities and their limits

LLCs and corporations generally keep the entity’s debts separate from the owners’ personal property. They don’t shield owners from their own wrongful acts or from debts they personally guaranteed, and courts can disregard an entity that isn’t kept separate (the “alter ego” doctrine). For an LLC owner’s personal creditors, California law generally limits remedies against the owner’s LLC interest to a charging order, which reaches distributions, with some exceptions.

Exemption laws

California exemption laws protect certain property from judgment creditors. The homestead exemption protects equity in a primary residence up to an amount based on the county’s median home price. The statute set a range of $300,000 to $600,000 in 2021, and the amounts rise each year with inflation, so current figures are higher. Many retirement accounts, public benefits, and some other property are also protected. Current amounts are listed on Judicial Council form EJ-156. See After a judgment.

Trusts

A revocable living trust does not protect property from its creator’s own creditors, and California generally does not protect property in a trust a person creates for their own benefit.

Marriage

In California, community property is generally liable for debts either spouse incurs during marriage, with some exceptions.

Voidable transfers

Under the Uniform Voidable Transactions Act, a creditor can ask a court to undo a transfer made with intent to hinder, delay, or defraud creditors, or certain transfers made without fair value while the person was insolvent. Courts look at factors such as transfers to relatives, transfers after a lawsuit was threatened, and keeping control of property after transferring it.