Equity Stripping for Asset Protection Planning
Once you have protected assets, particularly real estate, by placing them into an asset protection entity or vehicle, the work is only half done: You have made it hard for the creditor to get to the asset. However, the asset is still worth something because the ownership interest, the equity, has not been stripped out of the asset yet.
A creditor can still, in some circumstances and given enough time, navigate the layers of protection you have built or potentially make claims of fraudulent transfer and attack the asset. If it is a valuable asset, the creditor might decide the fight is worth fighting.
Equity Stripping ensures that if a creditor does choose to do so, there will be nothing left to get.
Equity Stripping Counseling is a process by which we identify assets whose value to a creditor could be reduced by having another party get a legitimate lien on the asset for substantially its entire value before the creditor does. "First in time, first in right"—the creditor will be deterred from trying to get a lien on the asset if the creditor knows someone else is ahead of him or her to get the proceeds of the sale.
There are several ways to do this, each of which requires careful consideration to see if it is the right way for your circumstances:
- Mortgaging the assets, creating a mortgagor's lien on the asset.
- Opening a Home Equity Line of Credit.
- Locating a friendly entity to extend a bona fide mortgage or second mortgage. (Generally, commercial lenders will not lend up to the entire value of the property, and will not be a subordinate lienholder. Friendly entities might, especially if owned by you.)
- Contracting a commercial bank to mortgage the property, and having a friendly entity buy the lien and the right to receive payments off the bank. (The bank will require a processing fee for handling the payment.)
- Creating a limited liability entity owned by the asset owners as well as a different outside owner to ensure or reduce the chance of all the owners being debtors of a common creditor.
- The limited liability entity needs a legitimate business purpose to function in most state's law, such as investment or a operating business.
- In exchange for the ownership interests, the owners sign promissory notes to the limited liability entity for the value of the assets stripped, and the limited liability entity secures the repayment obligation with a lien.
- Finding an existing limited liability entity business, and buying most of the ownership interest out in exchange for a promissory note for the value of the house, with the repayment obligation secured by a lien against the asset.
- Leaseback arrangements, especially to protect commercial and business assets.
- Several more alternatives exist.
When done with professional assistance, this form of Equity Stripping is legal, ethical, and safe.
Equity Stripping has another meaning outside of the Asset Protection Planning context—the borderline-unethical practice of investors who solicit homeowners being foreclosed upon to "save" them by offering a "refinancing." This is also referred to as equity skimming or foreclosure re-conveyancing. This actually amounts to the investor buying the house at foreclosure sale, taking all of the owner's equity, and then leasing it back to the former owner or charging rent. The investor then often gives the former homeowner stilted rates or impossible obligations, evicts the former homeowner when they cannot pay, and thereby acquires an investment property. The Equity Stripping for Asset Protection Planning methods explained here and used by us in planning is very different from this practice, and entirely ethical. It can be a way to save your home, not have some investor snatch it.