By: Michael Ioane
Equity stripping is a lesser known technique of asset protection. Often, it uses liens to achieve the purpose. As a person interested in asset protection, your first two questions may as well be: “what is a lien” and “how do liens bring about equity stripping”.
A lien is simply a claim made on an asset or property to ensure that a debt would be paid. The person or entity owed an amount or obligation is called a creditor and he is the one given a claim on the asset. A good example is a mortgage. The bank puts a lien on your house to make sure that you pay your monthly dues. It is the creditor. If you fail to make payments, the bank may take the house and sell it.
Multiple liens may be made on a property. When the time comes for these debts to be paid, the liens are paid off one at a time, usually in the order they were placed. For example, a house worth about $180,000 has the following liens placed on it, in chronological order: for $100,000 due to Mr. Albert, for $120,000 due to Mr. Brown and for $160,000 due to Mr. Colbert. If the house was indeed sold for $180,000, the first to be paid would be Mr. Albert. Next would be Mr. Brown. The problem here is that Mr. Brown can no longer be paid the full amount of what he was owed. Payment made to Mr. Albert in the amount of $100,000 only leaves behind $80,000 for Mr. Brown. Now imagine the predicament Mr. Colbert is in. He gets nothing as Mr. Brown takes the remaining $80,000 from the sale of the house.
Do you see the possibilities for asset protection brought about by the application of liens to a property? If you can bring about the application of liens and debts to your properties so that they are rendered without value, you have essentially stripped them of their equity. Anyone can place further liens on a house you have intentionally weighed down with heavy debts – but would anyone bother? It is unlikely as they would be aware that they stand to gain nothing from such an equity stripped asset. They would end up as another Mr. Colbert.
There are many different targets for equity stripping. You can, as shown, do this on real estate, vehicles with titles or a company’s accounts receivable. You can perform an equity strip using the Universal Commercial Code – 1 Form, cash loans or a Limited Liability Company.
As with any asset protection strategy, equity stripping is not without the risk of being considered fraudulent. Need to understand how to avoid these risks? Are you intrigued enough to understand what many lawyers do not? “Asset Protection Manual” by Michael S. Ioane is a book that will guide you through the intricacies of liens and equity stripping. It is advisable for you to know about these before your creditors do.