What Is Equity Stripping?
Equity stripping attaches legitimate debt to an asset so little equity is left for a creditor, then moves the loan proceeds somewhere protected. How it works.
Equity stripping refers to an asset protection strategy designed to protect assets such as real estate, vehicles, machinery, and other valuables. The process works by deliberately attaching loans or debt to the assets in order to leave little or no equity available for future creditors to reach. If someone wins a judgment against you, existing creditors will be paid first, especially those whose debts are secured by a specific asset.
If a building is worth $1,000,000 but has an existing mortgage of $900,000, it ceases being a particularly attractive asset for a creditor. If a third-party creditor were to force liquidation, they would have to make sure the mortgage is satisfied.
The most common case is protecting real estate, which can normally be done using cash out refinance, a home-equity line of credit, or commercial loan. The proceeds from the loan can be then transferred somewhere safe such as an international bank account held by an offshore trust or LLC.
Voidable Transfers
The one risk to be aware of when considering equity stripping is the potential for running afoul of the voidable transfers rule. The debts used to protect the assets must be legitimate, and the transactions must not be done to thwart a known creditor. Otherwise a court could undo the transactions based on voidable transfer laws. Ensure the timing is proper and the transactions are arms-length and genuine.
So called “friendly liens” are generally provided by a related party such as a friend, relative, or controlled entity instead of an independent lender. These can be recorded in the property records to give the appearance a real asset is encumbered. The problem is that such transactions can carry “badges of fraud” such as debtors keeping too much control, little or no real value transferred or exchanged, and timing these transactions close to a lawsuit.
The best version of equity stripping is one where the transactions look indistinguishable from traditional commercial lending: money changes hands, the loan is governed by a written note setting a market interest rate, and regular payments are made on time.
Offshore Trusts
The borrowing is the only side of the strategy. Where the funds go after the loan is funded is the real solution. Simply keeping the proceeds in the bank does little to protect that wealth and could actually make it easier for a creditor, due to the increased liquidity.
A judgment creditor can request financial documents and asks questions under oath regarding certain financial transactions. However, the loan proceeds can usually be moved into something that provides protection from creditors.
Equity stripping solutions work well with offshore asset protection trusts because these allow the proceeds from the loans to be moved out of the reach of U.S. courts. While buildings, machinery, or business assets can be impossible to remove physically, equity stripping can make these essentially worthless to a potential creditor in the U.S. while the actual economic value moves offshore.
Frequently asked
Frequently asked questions
An asset protection strategy that attaches loans or debt to assets such as real estate, vehicles or machinery, so little or no equity is left for a future creditor to reach. Secured lenders are paid first, which makes a heavily encumbered asset unattractive to a judgment creditor.
Yes, when the debt is legitimate and the timing is proper. A transaction made to thwart a known creditor can be undone under voidable-transfer law, often called fraudulent-transfer law, so the loans should be arms-length and genuine.
A lien provided by a related party, such as a friend, relative or controlled entity, instead of an independent lender. Friendly liens can carry badges of fraud, such as the debtor keeping too much control, little or no real value exchanged, or timing close to a lawsuit.
Somewhere that provides protection from creditors. Proceeds kept in an ordinary bank account can make a creditor's job easier. Equity stripping is often paired with an offshore asset protection trust, which can move the proceeds out of the reach of U.S. courts.