If you aren't a real estate investor, you may not be familiar with equity stripping and how you, as a property owner, can benefit from it. In this article, you’ll learn all about equity stripping and how it can be used to protect real estate assets and avoid lawsuits, including:
- What equity stripping is;
- How equity stripping works;
- Types of equity stripping;
- Why someone would want to strip their property of equity; and
- The benefits that equity stripping can provide
What is Equity Stripping and How does it Work?
Equity stripping is an asset protection strategy that involves encumbering real estate with liens to the extent that little or no equity is left in the property for claimants and creditors to take. The idea is to reduce the equity value in your property to little or nothing so that it is much less likely to attract litigation.
Creditors are less likely to try to pursue a claim against your property if it has little to no equity value. Because of this, equity stripping is considered one of the easiest asset protection strategies to implement—simply by rendering an asset less valuable, you can avoid lawsuits and minimize risk.
When implemented well, equity stripping is an excellent tool for both homeowners and real estate investors to protect their property from creditors and wanton litigation. Moreover, it is often the only way to do so.
Types of Equity Stripping
Types of Equity Stripping:
- Spousal Stripping;
- A Home Equity Line of Credit; and
- Friendly Liens
Spousal Stripping
Spousal stripping involves transferring ownership of property to a spouse who, presumably, doesn't have as much debt. Transferring title to the property from a distressed spouse to a less-distressed spouse placing the property beyond the creditor's reach.
The transfer of title is typically achieved with a Quit Claim Deed. Quit Claim Deeds are very often used to transfer title to property when the person receiving the title is not paying anything for it. Once a Quit Claim Deed is executed, it releases the original titleholder of all interest and liability in the property.
A Quit Claim Deed is an easy and inexpensive way to strip equity from your property, but it comes with certain risks and will not work in every case. You should, therefore, speak with an experienced attorney before attempting this strategy on your own.
Home Equity Line of Credit
Homeowners can strip equity from their property by taking out a home equity line of credit (HELOC). A HELOC enables a homeowner to borrow against the equity in their home while using the home itself as collateral.
The HELOC will show up as a lien against the property, even if it is unfunded or you don’t use any of the credit. As a result, your home will look less attractive to creditors, who will then be more inclined to leave you alone or agree to favorable settlement terms.
Friendly Lien
By placing a "friendly" lien against a property, you remove equity from that property and make it unattractive to those trying to collect any type of legal judgment.
This can be achieved by using a holding company or other business entity that you own or control to place a first or second lien against a property via a mortgage, promissory note, or UCC filing.
In most cases, a lien against your property takes precedence over any subsequent liens. Therefore, once you place a friendly lien against your property, you render any subsequent creditor liens ineffective and worthless to the creditor.
Having any lien against your property is, ordinarily, a bad state of affairs that can ultimately result in you losing the property. But, when you place a lien against your own property, it can be a simple and effective way to protect it from unscrupulous creditors.
Why Would Someone Want to Strip Equity From Their Property?
When implemented well, and as part of an overall asset protection strategy, equity stripping is an excellent tool to protect real estate from being lost to creditors and potential litigation. What's more, when equity stripping is used in conjunction with an LLC, you can also protect your personal assets from any debts and liabilities arising out of ownership of the real estate.
For example, if you set up a separate LLC for each piece of real estate you own, and treat each as its own business, each property will be insulated from the liabilities of the others. So, if a lawsuit is filed against property X, properties Y and Z will be insulated from that lawsuit. Similarly, if you treat each LLC as an entity separate from yourself, any lawsuits filed against the property it holds will only affect the LLC itself, not your personal property and assets.
The Benefits of Equity Stripping
- Creditors are less likely to pursue a claim against your property if there is not enough equity in it to satisfy their claim.
- A HELOC will give you access to credit, but you don't have to use it. In this way, the HELOC protects your equity in the property, but does not burden you with extra debt.
- Equity Stripping can be used in conjunction with a business entity such as an LLC for more asset protection and to make your property even less attractive to creditors.
Consult With an Experienced Wyoming Legal Professional
As an asset protection tool, equity stripping can be a simple but effective means for real estate investors and homeowners to render their property less attractive to creditors and litigants. That said, there are certain exceptions and risks associated with equity stripping that often require special consideration.
Therefore, before attempting to implement this asset protection strategy on your own, you should consult with an experienced Wyoming legal professional who can help you minimize any risks and avoid any complications.