I am using sharepoint 2010.
I am wondering how to set library permissions so that only the docs/folder that a user has access to are visible.
I do not want users to see folders and documents that they don't have acces to.
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You'd want to give all the users Read permission to the library. Then for each folder in the library, over ride the permissions so the desired user has contribute permission and remove everyone else.
This will allow everyone to be able to click on the document library in the navigational structure so they don't have to remember the URL specifically to their folder. It will also ensure that they only have access to their folder as it'll be the only one visible.
Set the Item Level Permissions (Folder / Document / Item), SharePoint will automatically do the security trimming based on the permissions matrix.