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Related topics: debt, bankruptcy, credit cards, credit counseling, Liz Weston

Life hasn't turned out the way you'd planned.

You certainly had intended to pay back the money you borrowed, but now you can't. What you may not realize is that your creditors have plenty of ways of getting whatever cash or assets you have left, with or without your permission.

You don't have to make it easy for them. Whether you're contemplating bankruptcy or just need a little breathing room while you get back on your feet, you can take steps legally to protect what 'you have left -- as long as you know how.

Before we start, let's lay down some important "don'ts," such as:

  • Don't use your credit cards or lines of credit. As soon as you realize you're going to have trouble paying what you owe, stop borrowing. Any further use of your credit may constitute fraud. Not only is that wrong, but it could get your bankruptcy case thrown out of court if you ultimately decide to file.
  • Don't transfer your money or belongings to others. Same deal: Trying to sneak your assets into other friendly hands can be considered "fraudulent conveyance." Even paying your mom back ahead of your other creditors can cause problems. Get good legal counsel -- more on that in a minute -- before you pay any creditors or move any assets, once you know can't pay everyone. And whatever you do, don't try to hide money by buying stuff like a car, real estate or jewelry. Anything purchased shortly before bankruptcy can be put up for creditor grabs or can get your case thrown out.

    Image: Liz Weston

    Liz Weston

  • Don't tap your retirement funds. The money in your workplace retirement funds has unlimited protection from creditors, while individual retirement accounts are protected up to $1 million. Breaking into these piggy banks is foolish on a number of levels. You incur hefty taxes and penalties when you tap your retirement funds prematurely because -- no surprise -- the government wants you to leave that money alone. If your financial problems are big, you're unlikely to solve them this way, so you're essentially throwing good money after bad. Also, draining retirement funds when you're young is a good way to wind up impoverished when you're old. Don't do it.
  • Don't go it alone. Even if you're sure you can ride out your current problems, you don't know what you don't know. State laws vary widely when it comes to how much power creditors have and how miserable they can make your life. So scrape up a few bucks to consult an experienced bankruptcy attorney so you understand what's at stake and what your options are. Get referrals from the National Association of Consumer Bankruptcy Attorneys. Many of these attorneys offer discounted or even free initial sessions.

With all that said, here's what you need to do:

  • Take action on your bank accounts. If you have checking or savings accounts at a bank that has also issued you a credit card, line of credit or other loan, the lender can seize money in those accounts once it realizes you can't pay. Move the money to a bank or credit union where you don't owe anything. If you don't owe the bank, you still need to take action by canceling any automatic-payment arrangements you have with other creditors. If the creditor ignores your request and processes a debit after you cancel the automatic payments, you may need to close the account and move your money elsewhere. If you get Social Security income, including retirement, disability and survivor benefits, that money is exempt and cannot be seized by creditors. New rules that went into effect last year require banks to protect a sum equal to the amount of federal benefits directly deposited into your account within the previous 60 days.
  • Keep contributing to your retirement accounts. Suddenly dumping a bunch of money into a new IRA could cause problems if you file for bankruptcy later, but there's no reason to halt your regular contributions if you can continue to make them. Remember, this money is protected by law from creditors.
  • Stay in touch with your creditors. Hiding your assets doesn't mean hiding yourself. Refusing to talk to your creditors may encourage them to take other steps to get your attention, such as filing a lawsuit that could result in a lien against your bank accounts or garnisheeing your wages, said Gerri Detweiler, a personal-finance expert for Credit.com. You don't want to say much -- just that you can't pay right now -- because offering other details can get you embroiled in discussions you don't want to have. One way to stay in touch while still controlling the interaction is to drop your current phone line and get two prepaid phones, one for friends and family and the other for dealing with creditors, advised Steve Rhode, a former creditor counselor who runs GetOutOfDebt.org.
  • Get your stuff out of your car. If you're even one day late, you're in default on your car loan, and your ride can be repossessed. Lots of lenders are moving faster on repos these days, sometimes authorizing them in as few as 10 days after your missed payment, said Philip Reed, a senior consumer-advice editor for Edmunds.com. You can try hiding your car in a friend's garage or miles away from where you live, but chances are if you use the car, the repo man can find you. What you don't want to happen is to lose the car and also the tools you need for your job or that nice aftermarket sound system (put the original back, so there aren't gaping holes in the dash the lender can charge you for).

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  • Adjust your withholding. It's not smart to give the government a tax-free loan of your money, but it's especially not smart to build up a big tax refund if you owe Uncle Sam. Run-of-the-mill creditors can't nab your refund, but the Internal Revenue Service can if you owe back taxes. Your refund also can be seized for unpaid child support, student loans or any other government debt.
  • Run, don't walk, to your attorney if you get sued. Legal action means you need legal protection. Don't ignore the lawsuit or assume it won't help to fight back. If you don't show up in court, your creditors could tack on unfair fees or ridiculous interest to what you already owe. And it's not uncommon for collectors to sue over debts that are legally too old: Once the debts are beyond your state's statute of limitations, which ranges from three to 15 years, creditors aren't supposed to be able to bring lawsuits against you, but you have to show up in court to point that out.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.