Understanding Equity Stripping in Asset Protection

Many real estate investors and business owners are drawn to the idea of “friendly liens” (also called equity stripping) as a way to shield assets from lawsuits and creditors.

The strategy is simple:

✔ Place a lien on your property using an entity you control (like an LLC or corporation).

✔ Make it appear as though your property has no equity, discouraging lawsuits.

✔ Deter creditors by making it financially unappealing to go after your assets.

At first glance, this sounds like a clever legal loophole. But here’s the problem: courts don’t buy it.

In reality, friendly liens fail under legal scrutiny and can actually increase your legal and financial risks. Let’s break down why.

What’s the Difference Between a Legitimate Lien and a Friendly Lien?

🔹 Legitimate Lien: A lien that reflects a real financial transaction, such as:

✔ A mortgage from a bank.

✔ A secured loan with actual funds transferred.

✔ A business loan backed by collateral.

🔹 Friendly Lien: A lien with no real exchange of value, often used as a legal smokescreen to make assets look encumbered.

Key Issue: If a lien doesn’t represent a legitimate debt, courts can—and will—disregard it.

💡 Example:

A real estate investor places a $1 million lien on their rental property, held by a Wyoming LLC they also own. A creditor sues and challenges the lien, proving that no money was actually loaned. The court invalidates the lien, and the creditor gains access to the property’s full equity.

Why Friendly Liens Fail in Court

1. Fraudulent Transfer Laws Make Friendly Liens Risky

Courts routinely strike down friendly liens as fraudulent transfers when:

✔ There’s no actual debt.

✔ The lien was created to delay or hinder creditors.

✔ The debtor still has full control over the asset.

📌 Key Court Cases Against Fraudulent Transfers:

1️⃣ In re Eckert, 388 B.R. 813 (2008) – A debtor admitted via email that his asset transfers were meant to avoid creditors. The court voided the transfer.

2️⃣ Grochocinski v. Schlossberg, 402 B.R. 825 (2009) – A homeowner transferred their property to a relative while still living in it. The court ruled it fraudulent.

3️⃣ Image Masters, Inc. v. Chase Home Finance, 489 B.R. 375 (2013) – A court invalidated a lien when it found no real financial exchange.

💡 Bottom Line: If a lien is only for asset protection and not based on a real loan transaction, courts will disregard it.

2. Friendly Liens Can Backfire with Slander of Title Claims

If a creditor challenges your lien and proves that it’s fraudulent, you could face serious legal penalties, including:

✔ Slander of Title: Filing a false lien can result in financial damages.

✔ Civil Penalties: Creditors may sue you for damages caused by fraudulent filings.

✔ Court Sanctions: Judges do not take kindly to deceptive legal maneuvers.

📌 Example: A real estate investor places a fake $500,000 lien on their property. The creditor sues and wins a slander of title judgment, resulting in additional financial penalties against the investor.

💡 Bottom Line: Fake liens don’t just fail—they can cost you even more money.

3. The IRS Does Not Look Kindly on Friendly Liens

If the IRS suspects that you’re using friendly liens to hide assets or delay tax payments, you could face:

⚠️ Tax Fraud Investigations

⚠️ Heavy IRS Penalties

⚠️ Potential Criminal Charges

📌 Example:

A taxpayer places a $750,000 lien on their home to avoid IRS collections. The IRS investigates, finds the lien was not backed by a real financial transaction, and voids the arrangement—exposing the taxpayer to severe tax penalties.

💡 Bottom Line: The IRS aggressively pursues fraudulent asset protection schemes.

Why Friendly Liens Are a Weak Asset Protection Strategy

Courts have repeatedly ruled against equity stripping and friendly liens because:

❌ The debtor still controls the asset, exposing fraudulent intent.

❌ There’s usually no real financial transaction backing the lien.

❌ Transfers to related entities (like an LLC you own) raise red flags.

❌ Friendly liens do not stop court orders or judgment enforcement.

Even if you manage to strip the equity, the money cannot sit in a U.S. bank account—judges can freeze domestic assets, rendering the entire strategy ineffective.

💡 Bottom Line: Friendly liens might look good on paper, but they fail when tested in court.

What Actually Works for Asset Protection?

Instead of risky, legally questionable tactics, real asset protection strategies focus on legitimate legal structures that courts have upheld for decades.

1. Offshore Asset Protection Trusts (Cook Islands, Nevis)

✔ Takes assets outside of U.S. court jurisdiction.

✔ Creditors must sue in an offshore court—where legal standards favor debtors.

✔ Has successfully protected assets in multiple high-profile lawsuits.

2. Hybrid Asset Protection Trusts (The Bridge Trust®)

✔ Provides offshore trust protection while remaining U.S. tax compliant.

✔ Starts as a domestic trust but can “convert” offshore in an emergency.

✔ Legally shields assets without violating fraudulent transfer laws.

3. LLCs & Limited Partnerships (LPs) for Liability Protection

✔ Properly structured LLCs can protect personal assets from lawsuits.

✔ Limited Partnerships provide additional charging order protection.

✔ Unlike friendly liens, these strategies are court-tested and legally sound.

Key Takeaways: Why Friendly Liens Fail

✔ A lien must be backed by a real financial exchange to be valid.

✔ Courts have consistently ruled against fraudulent liens and equity stripping.

✔ Friendly liens can lead to slander of title claims, civil penalties, and IRS investigations.

✔ Judges can freeze U.S. assets, making domestic equity stripping ineffective.

✔ Legitimate asset protection uses offshore trusts, LLCs, and proven legal structures.

💡 Bottom Line: If your asset protection strategy wouldn’t hold up in court, it’s not a real strategy—it’s a liability.