Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
I have heard of many investors filing liens on property or on friend’s property in an attempt to fend off legal challenges that would arise from someone identifying this equity. I realize that entities can be used as a form of protection in lieu of doing this, but I was wondering about the legality of this action. It seems quite guruish to me. I am all for it if there are not downside risks to doing it.
It is probable this has been discussed elsewhere, but I couldn’t think of what to search on to find other threads. What are your thoughts on this?
It is probable this has been discussed elsewhere, but I couldn’t think of what to search on to find other threads. What are your thoughts on this?
I believe you're talking about "equity stripping". It makes your property look like there's little to no equity in it so a sue-happy lawyer will be less willing to take you to court.
There are legal ways to do this, but definitely consult your attorney first. Basically, you take out a HELOC or secure a 2nd mortgage against most of your equity, if you can nowadays. Then quickly pay off most, but not all, of the loan with the proceeds. As long as there is still a small balance, the lien remains on public records. But remember, only the initial amount of the loan and its date gets recorded, correct?
Now some nosy lawyer will have no idea what the balance owed is, but will assume it's pretty high if the loan is only a few years old. I'm sure he can subpoena records or something to get the details on the loan, but that will require work on his part and probably not something he'll do on contingency. He'll probably demand payment, a large retainer, from his client who is interested in suing you and that, hopefully, will be enough for them to drop the case.
Just don't falsely file a lien using a sham loan. I think that's what most of the warnings above are alluding to.
... a HELOC that clouds title without money owed. Does anyone know what title looks like in these cases? Does the max line [sic] amount show up and nothing else?
...
I encounter these occasionally as I review title prior to sheriff sale. From my limited encounters with these, the lien for a HELOC is always recorded at the maximum drawable amount, regardless of how much has actually been drawn. Of course, since I'm evaluating these HELOCs with the collateral on the way to sheriff sale, I just assume they have been drawn to the max for obvious reasons ...
Bryan, I have to agree with Bill on most of this topic:
1. If you have someone record a sham lien against your property, it is going to be illegal everywhere regardless of whether there are specific statutes prohibiting it.
2. If you borrow money from a friend and grant him a security interest in your asset, you have a real loan to pay back and the security interest merely encumbers your property and is not really an asset protection strategy.
3. If you and a buddy of yours "trade" loans and liens, it is in reality a sham transaction. If you guys do just one such deal, it may be hard to prove that it is a sham. But if you want a scalable solution to the problem, this is not a good way to go because a pattern of such deals will pretty much seal your fate in a court of law.
4. Mitch's idea is one possible way to discourage lawsuits. But I do not think it is as effective as it seems. Collection agencies typically do not delve into your financial details, so it will not dissuade them. Lawyers, on the other hand, typically take on a case based on the strength of the lawsuit and a somewhat more thorough examination of your assets than just checking the public records.
5. I think the idea of owning a company that lends to you and records a lien is also quite weak. Most judges are not going to be excited to see that. Plaintiff's lawyers, if they see a Nevada corporation with a lien against your property, will be even more excited to sue you because it is an indication that you have assets worth protecting.
Most simple asset protection strategies, and especially the ones that seem too easy, are not going to work that well.
Now, if you have an offshore "entity" that owns your home . . .
Thanks Vikram...honestly I'm not really keen on the whole idea either and I don't do it with my portfolio. I have seen it recommended a lot though so I figured it was worth exploring in a thread. When someone says something is against the law and then can't provide laws or cases to back it up the argument is quite weak.
I agree with much of what you have written above and it makes a whole lot more sense to me just to use entities correctly and keep debt on product to discourage suits. Short of an irrevocable trust that equity is always a big target though!
We now have another Bank Examiner on BP! We exchanged PMs earlier. Maybe you can get him to perform due diligence for you and post case law with his opinions, but I won't be and I doubt he does either.
Asking that is ridiculous and nothing but a debating ploy. Along those same lines, why not ask a law enforcement officer to recite case law for you when he hands you a ticket for careless driving, afterall, it is his opinion! Have a nice day sir.
When someone says something is against the law I think it is completely reasonable to ask what law. The traffic cop that pulls you over should know what law you are breaking...he may not be able to cite it, but someone will before they throw you in jail.
I can't imagine a non-attorney posting citations Bill...but then again, you know the law better than most attorneys as you have stated many times.
Bryan, was that you running through the park naked? That's the kind of commenst that get us in trouble saying I have stated something I have never said. Like the traffic cop, I told you and I also told you how to find it. I'm sure before someone throws you in jail they will tell you what the offense is, but might not tell you how to find it. I realize that there is alot of resentment toward me for pointing out things many investors don't really want to hear, too bad. I'm not going to allow new investors to get bad information or assume that some tactic is acceptable when it is not, at least while I'm around. It's simply food for thought that might not taste good. Have a great evening and look forward to better interactions on other topics. Later....
So, Bryan
I'm dying to know. Just what have you done? There has to be something behind this. Why wouldn't ah, say moral, ethical and legal methods of asset protection be sufficient? Appearantly, you don't think they are adequate for you. Why? Fess up! It's just us. We won't tell.
I haven't done anything Ralph. This thread was started because another BP member recommended doing it. I would cite him and I am sure I can find the thread, but it isn't important.
Keep in mind that there are lawyers writing on this topic. See the article written above. I haven't done anything like this, but I certainly would not summarily dismiss it either. If I called it illegal and could not cite either statutory or case law after repeatedly being asked to do so I wouldn't continue to pound the "illegal" drum either. I would back off and admit that I didn't have the information requested and say that there may be some cases where it is okay because I simply don't know everything.