While the name itself may sound a bit counterproductive, equity stripping is actually a long-standing and straightforward asset protection method used by property owners. There are various forms of equity stripping for different scenarios, but all forms are essentially aimed at the same goal of safeguarding your property ownership.
So, what exactly is equity stripping and how does it work?
Equity stripping is a financial strategy that’s implemented to reduce the overall value in a real estate asset. It’s considered a dependable asset protection strategy that makes properties appear less attractive to creditors and therefore reduce their likelihood of including the properties in a debt claim.
Typically, creditors and lending institutions won’t go through the trouble of levying a claim against a property if its equitable stake does not appear worthwhile. Meanwhile, the owner still retains control of the asset, including cash flows and use of the property. Additionally, when this strategy is paired with the limited liability protection of an LLC, you can protect both your real estate assets and your personal assets.
Keep in mind, however, that this strategy is not risk-free and only works if done correctly. It’s best to seek the advice of a legal professional before embarking on this course of action.
There are a number of different strategies for stripping assets of their equity, but two methods in particular are the most common. These two types of equity stripping are known as spousal stripping and home equity lines of credit (HELOC).
Spousal stripping is an equity stripping strategy in which a debt-distressed owner transfers ownership of a property over to their spouse who has less debt. Transferring the property title like this will allow the debt-distressed owner to file a quitclaim deed in the spouse’s name.
A quitclaim deed is a method used for transferring interest in a property. In this case, the quitclaim deed will serve as a means of saying that the debt-distressed owner does not have a valid ownership stake in the property and thus protect it from creditors.
Another equity stripping strategy is a home equity line of credit, also known as a HELOC. This is when homeowners borrow against the equity in their home to diminish their equitable interest in the property. In this case, the home is used as collateral and becomes less appealing to creditors as the equity is stripped away, making it less likely that any claims are levied against the asset.
Keep in mind that while a HELOC will allow homeowners access to their home’s equity, it does not mean they must use it. In this way, a HELOC services as an equity shelter that does not add any additional debt to your situation.
Whether you’re a homeowner or a real estate investor, there are several ways that property owners can utilize equity stripping to protect their real estate assets. Essentially, any individuals that want to make themselves and their assets appear less attractive to creditors would likely find equity stripping a viable strategy.
Consider the following example to get a sense of how equity stripping can be used to protect your property assets. Say that you’re a homeowner who has built up $200,000 worth of equitable stake in a $400,000 home. In other words, you’re half way to fulfilling your mortgage obligations on the home (not including interest). Using a home equity line of credit (HELOC), you can borrow against your equitable stake in the home, using it like a $200,000 line of credit. As you do this, you’re simultaneously diminishing the value of the asset and therefore making it less attractive to any potential creditors.
Additionally, equity stripping is a legal asset protection strategy when carried out correctly. Generally, it’s permissible so long as you make the necessary moves prior to any lawsuit or creditor having claim. Utilizing an LLC is another way to strip equity and protect your assets from creditors, as you can only be found liable for your interest in the LLC.
Keep in mind, however, that equity-stripping strategies are not bulletproof. There may be certain exceptions that surpass the liens placed against your assets, such as a federal tax lien in which the government has an interest in your property. For this reason, always consult a legal professional when carrying out such a strategy.