Asset Protection Through Debt

This is a topic you don’t hear nearly enough about. The idea is so simple that there’s not too much to teach, so rarely do you hear guru’s talking about it. Most attorneys never mention it either because it might limit the number of LLC’s and trusts they get to set up for you.

So asset protection through debt is a very important concept, mostly because it’s hard to pursue something that isn’t there. If someone tries to sue you and you have debt against properties, cars, etc. there is very little for someone to take.  I also just want to confirm the fact that LLC’s are not foolproof, they can be penetrated.  Debt can act as asset protection whether you’re in an LLC or not. Avoiding litigation isn’t the only means of security when it comes to debt based asset protection either.

For years my parents taught me to study hard, work hard, get a good job, buy a house, and pay it off and live happily ever after. Obviously, this idea has numerous flaws today, like for one people are living a lot longer, they’re more mobile, and there’s less job stability too. The days of Dad working at the plant for 40 years until retirement are over as well. So what benefit does paying off your house really have? Especially when you can make a much higher return with your equity, pay the mortgage, and turn a significant profit than say…having the peace of mind of not having a mortgage, making  a ZERO PERCENT return on your home, and protecting the bank rather than protecting yourself.  Liquidity is really the best piece of mind.

If your home is worth $500K and you only owe $200K you’re in a pretty risky situation. The only one protected here is the bank. If for some reason you couldn’t pay they would foreclose and then seize any equity you might have. I get that in today’s market many of us don’t have equity but you could see where this could become a problem. God forbid, you got lung cancer, were out of work for 9 months and went to the bank for a loan, they would turn you down because you didn’t have a job.

This is where debt could be your best friend. If while things were good you had placed a 2nd mortgage on your primary for up to 90% Loan To Value, even if you had a $0 balance on your line (HELOC) of credit, you would show $450K of debt down at the local county court house. Not only would this give you liquidity through check writing capability but most attorneys would not sue to try to liquidate the $50K of equity on a jointly held property in most states (after what’s spent on legal fees, they would be far from the 50K in profit).

Most people cannot get over the notion that there’s good debt and bad debt, and a lot of times debt can help you. Mortgage debt is good debt! Good debt is deductible debt (like mortgage interest, student loan, credit card debt if it’s through your business, etc). Any debt going down in value is bad debt; like car loans, the majority of credit car debt, and personal loans.

So what would you rather do: capitalize on the use of good debt or would you rather be the product of bad debt?