OTHER ASSET PROTECTION TOOLS - Equity Stripping
"Equity stripping"
is a relatively new term in asset protection law describing
an old asset protection planning technique. Equity stripping
refers to pledging a non-exempt asset as security for a money
loan. In most cases, the debtor obtains a loan from a
commercial bank and secures the loan with a mortgage or lien
on the non-exempt assets he wants to protect. The bank
records the security instruments which gives the bank's security
interest priority over judgments subsequently obtained by other
creditors. In order for these other creditors to attack
the encumbered asset, they would first have to pay off the amount
of the lender's secured loan. Pledging a valuable non-exempt
asset to secure a new loan essentially drains the equity from
a non-exempt asset and permits the debtor to move the equity
beyond the reach of creditors. Exempt assets, such as
Florida homestead or retirement plan, should not be pledged
to borrow new money because these assets are already protected
from creditors, and cash obtained from a loan secured by an
exempt asset may become unprotected.
Equity stripping is
a useful asset protection tool in different types of situations.
Business owners or professionals often have large accounts receivable
or valuable equipment which cannot be assigned or titled in
other names. Banks which give lines of credit almost always
ask for a first secured position on a business's receiveables
and equipment because these are the most liquid and valuable
business assets. The bank's security interest is established
and recorded when the line of credit is established even though
no money is lent to the debtor. The business can borrow
money on the line of credit if and when it perceives a legal
problem. Money borrowed through a line of credit is not
protected from creditors, and the business must find other means
to protect the borrowed fiunds such as distributing money borrowed
to the business owners to pay principal on their homestead mortgage.
Individual debtors
also find that encumbering non-exempt assets is a useful tool.
For example, a person who moves to Florida to take advantage
of Florida's liberal exemptions can bring with him personal
property, but he cannot transport real property owned in the
original state. Many new Florida residents will mortgage
their existing home in another state and use the mortgage proceeds
to purchase a Florida homestead. Another example is a
real estate investor who owns multiple properties with equity.
Changing title to multiple properties involves expenses of setting
up new legal entities and substantial transfer taxation.
An alternative is to buy new properties with loans cross-collateralized
by presently owned properties which are otherwise unprotected.
A general advantage of equity stripping
is its defense against claims of fraudulent conveyance.
Pledging assets for newly borrowed funds provided by unrelated
third parties, many of whom are commercial institutions, is
a common business practice which can be justified many ways
other than as an intentional asset protection device.
