Equity stripping is an asset protection strategy that entails encumbering an asset with a lien or liens so that little or no equity remains in the asset. Equity stripping is a great asset protection strategy for real estate and non-business assets because it protects the asset from both inside and outside liabilities.
A lien is a charge against or interest in real estate to secure payment of a debt or performance of an obligation. Thus, there are two basic types of liens:
Liens are enforced in the chronological order in which they are placed on the property. A junior lien holder may foreclose, but the proceeds will first go to the senior lien holders.
If nothing is left over for the junior lien holder, they are simply out of luck. Thus, equity stripping can make a property seem worthless to a creditor.
While there are various equity stripping strategies, all of them involve placing encumbrances on real estate assets so as to effectively strip them of any substantial equity interest. By rendering the equity in the property troublesome or expensive to access, you can protect your home and other real property from being seized in a lawsuit.
The idea is very simple - make your property look as worthless as possible to potential creditors. That being said, not all equity stripping strategies are created equal and some are more effective than others. Here is how the most common lien stripping strategies stack up:
Home Equity Line of Credit
You can take out a home equity line of credit (HELOC) on a property to make it less attractive to a potential creditor. This will show up as a lien against the property, even if it is unfunded.
Using a HELOC to deter creditors from coming after real property is easy to do and it won't cost you a penny until you pull from it. Thus, it is a cheap (if not completely free) and virtually risk-free lien stripping strategy.
On the plus side, using bank loans as a lien stripping strategy is effective because when a bank puts a lien on your property, it typically goes unquestioned. But, even if a creditor does attack the lien, a bank lien is very hard to undo.
On the other hand, the interest payments on a bank loan can make it expensive for asset protection. To offset the interest payments, you may want to invest the loan proceeds, but this comes with high risk of its own.
What's more, when you do a conventional bank loan, the loan gets paid down over time. The more the loan is paid down, the more equity is exposed to your creditors.
Furthermore, if a creditor is ultimately successful at obtaining a judgment against you, it may impair your ability to make the loan payments and could lead to another judgment or foreclosure against you. Still, using a bank loan to strip equity from a property might be worth it if you need the loan anyway.
A bogus lien is one that is filed with no consideration for the lien. If a bogus lien is never challenged, it can work as an asset protection tool and is easy to do. But, it is also easy for a creditor to undo. All the creditor will need to demonstrate to the court is that the lien is without consideration. If the creditor is successful, the lien will be undone and the underlying equity will be exposed to satisfy the creditor's claim.
Borrowing from a Protected Entity
Yet another way of harmlessly encumbering your real estate that is less conventional, however a lot easier than it sounds, is to borrow money from a protected entity that you own, such as an LLC, and then have that protected entity place a lien on your property. This and many more asset stripping strategies can be implemented to render your property less desirable to creditors with very little effort and cost.
If carried out as part of a well-thought-out strategy, equity stripping can be a very effective asset-protection mechanism. It goes along well with other asset strategies, such as using protected entities like LLCs to shield real estate, business assets, and their owner's personal assets from lawsuits and judgments.
These strategies have to be implemented far ahead of time, so as to escape being considered fraudulent transfers by a judge. Like it is with all asset protection strategies, working with an attorney who has particular expertise in this area will be a huge advantage.
For more information regarding equity stripping in Wyoming, contact an experienced Wyoming business law attorney.