FRIENDLY LIENS - EQUITY STRIPPING
Equity stripping (sometimes called Friendly Liens), is the process of reducing the equity in your real estate or other equity heavy assets. It is a long used asset protection strategy. You encumber your property with debt leaving nothing for creditors to get. By doing so you protect your real estate, while making it unattractive to those trying to collect on a judgment. Note that there are certain requirements that you must meet in order to ensure the Friendly Liens, technique is effective. See 10:40 of my book, Friendly Liens. In addition there are several ways to execute this strategy.
Friendly Liens
Equity stripping is conducted to make your real estate valueless to creditors. There are several different equity stripping method. They all make the equity in your property costly for creditors to obtain, thereby insulating your property from creditor attachment.
Traditionally, the most common form of equity stripping was to quitclaim the title to the spouse who was less likely to be sued. Today the threat of divorce is greater than threats to property.
Using HELOCs
Borrow against and give the bank a lien on your real estate. Cash is easier to protect then real estate. With the common home equity line of credit (HELOC), a lender is given a lien against the equity in your property ("strips it").
Even an unfunded equity loan will make it more difficult and costly for a creditor to get at the equity in your property and will often deter them from suing. Creditors cannot tell how much you actually owe.
When the loan is funded, the lender receives a lien for the amount borrowed that must be paid before the creditor, further reducing a creditor's motivation to sue.
Friendly Liens
A "friendly loan" from a business controlled by someone you know. Because of that personal relationship, the lender will not foreclose due to slow or non-existent loan payments. To pass muster the loan must be made for an economic purpose, must be documented and the mortgage lien recorded. In addition, loan payments must be made on time and in accordance with the loan documents. Many Friendly Liens placed for the protection of property are dismissed by the courts because the borrower never made or documented making the mortgage payments.
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Example.: Assume two LLCs owned by the same Master LLC. LLC #1 makes a loan to LLC #2 and uses LLC #2s property as collateral. If Company #2 is sued and a judgment lien is obtained against their property, that judgment Lien is junior to your Friendly Liens. Eventually, when the property is sold, the proceeds are used to pay off 1st to the Bank, the 2nd to LLC#1, leaving no equity for the creditor. Although this is a very simplistic and transparent example, more complex structures using offshore entities and trusts are often used that make it even more difficult for creditors. |
Conclusion
Equity stripping by Friendly Liens is a powerful asset protection tool, when done as part of a thought-out and well-crafted plan. Friendly Liens are best used with other protection strategies, like the real estate LLC structure which protects the property and owner alike.
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