A caller wanted to purchase a residential lot and then build on the lot his primary residence. The caller was about to go into default on a substantial amount of credit card debt and was concerned about creditors taking the lot prior to his ability to complete and occupy a house.
Several entries on this blog have pointed out that homestead protection is not effective until a property is occupied, and that houses under construction are not protected. This caller proposed to take title during construction in a separate Florida limited liability company and then convey title to himself personally when a certificate of occupancy was issued. If a judgment was entered against the debtor prior to occupancy and homestead protection the judgment would not attache to the LLC. Moreover, the debtor’s interest in the LLC could not be taken by creditors. Once the debtor is ready to move into the property he would have to convey title out of the LLC to himself personally because homestead protection is not available to LLCs or other legal entities other than natural persons.
One thing this caller did not understand at first was the length of time it would take a typical credit card company to obtain a judgment. Once credit cards go into default banks usually try to use collection agencies paid on contingency to collect debts. The credit card companies will avoid the expense of paying collection attorneys for at least several months after initial default. Not all credit card companies will file collection suits. Those suits that are filed can be delayed many months by skilled defense attorneys.
I pointed out to this caller that it he took defensive action it would probably be nine months or more after initial credit card default before a credit card company could get a judgment. By that time his house would probably be complete. If my time estimate is correct he would not have to take title in an LLC pending construction and could avoid legal cost of LLC creation and documentary stamps for title transfer.
On the other hand, if a creditor achieved a judgment faster than my estimate, the judgment would immediate attach to any real property titled in the debtor’s name. Once a judgment attached to the building lot the lot could not be protected as homestead property by subsequent occupancy. We decided that the conservative plan would be to purchase the lot in an LLC where it would he held until occupancy.
About the Author
Jon Alper is an expert in asset protection planning for individuals and small businesses.
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